President Obama repeats his desire to end the Bush-era income tax cuts for higher-income individuals. Generally, the President defines as single individuals with incomes over $200,000 and married couples with incomes over $250,000. The primarily changes would be as follows:
- The top individual income tax rates would increase to 36% and 39.6% after 2012. Absent a change, for 2011 and 2012, the top two individual income tax rates are 33 percent and 35 percent.
- Capital gains and dividend taxes would be increased for higher-income individuals. After 2012, higher-income individuals would pay capital gains and dividend taxes at 20 percent rather than at 15 percent.
- Itemized deductions of higher income individuals would be limited to 28% of the amount contributed, even though the same taxpayers’ income would be taxed at a higher rate.
After 2012, the President proposes to return the federal estate tax to its 2009 levels; meaning, a maximum estate tax rate of 45 percent and a $3.5 million exclusion.
Despite the President’s talk to the contrary, the fiscal 2012 budget does not include a cut in the U.S. corporate income tax rate. Any cut in overall corporate tax rates would likely be accompanied by corporate tax increases by eliminating not-yet-specified “loopholes”.
Numerous corporate tax increases proposed in the fiscal 2012 budget include the following:
- International taxation – An estimated $129 billion in additional revenue is projected over 10 years pertaining to items such as limiting income shifting through intangible property transfers, and changes to the foreign tax credit rules.
- LIFO – The last-in, first-out (LIFO) inventory accounting method would be repealed for federal income tax purposes. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its first-in, first-out (FIFO) value in the first tax year beginning after December 31, 2012. This proposal would raise an estimated $52.8 billion over 10 years.
- Fossil fuel tax preferences – The Tax Code includes a number of tax incentives for oil, gas and coal producers, most of which would be eliminated. These proposals would raise an estimated $46.1 billion over 10 years.
- Financial institutions – A new tax would be imposed on large U.S. financial institutions, labeled as a financial crisis responsibility fee. The fee would raise an estimated $30 billion in additional revenue over 10 years.
- Carried interest – This investment-related income would be taxed as ordinary income (vs. as capital gains). This would raise an estimated $14.8 billion in additional revenue over 10 years.
- Insurance companies – Insurance companies are subject to technical tax rules which would be altered. These changes would raise an estimated $14 billion over 10 years.