It seems out of nowhere, President Obama has made a significant change in his tax plan proposal.  Obama’s 2013 budget year now calls for more taxes on the wealthy, specifically a higher tax on dividends.

His new tax plan calls for an increase of the dividend tax to a maximum of 40% for households earning $250,000 a year.  Coincidentally, that is equal to the higher maximum income tax rate set to go into effect in 2013.

According to the Obama administration, the increase in the dividend tax rate is needed to pay down the federal deficit and to make the tax code more progressive.

“Choices had to be made,” a senior Obama administration told reporters, explaining the bid to raise more than $200 billion over a decade with the steeper dividend taxes on the wealthy.

In addition to an increase in the dividend tax rate, the Obama administration is proposing to raise the current 15% long-term capital gains tax to 20% for the wealthiest Americans.

If you look closely, the Obama tax plan to tax the rich seems like an election year campaign ploy to win the lower and middle class vote.  Fortunately for the wealthy and big corporations, it is extremely unlikely that Obama’s tax provisions will be become law, including his dividend tax increase.

“This is a reversal of what was a very specific policy feature of the first three budgets to keep dividends and capital gains taxed at the same rate,” said Michael Mundaca, a former top Treasury tax official under Obama, now at the accounting firm Ernst & Young.

“Companies may be more likely to retain earnings or seek alternatives ways to distribute their earnings such as by buying back stock,” Mundaca said.

Tax experts believe that big corporations may accelerate 2013 dividend payments into 2012 to dodge tax hikes.

“I wouldn’t be surprised if we see moving all their 2013 dividends into 2012,” Kies said. “A lot of U.S. companies are sitting on cash.”

source: reuters.com

President Obama and his administration are seeking almost a $1 trillion tax increase over the next decade on US taxpayers earning more than $200,000. He also wants to take an additional $400 billion from businesses even as it retools a proposed crackdown on international tax-avoidance techniques; according to a Feb 2, 2010 Business Week article.

Believe it or not, the Obama income tax proposal would actually reinstate income tax rates enacted by former President Bush 10 years ago. The income tax rates for single Americans making over $200,000 or joint filers earning more than $250,000 would increase to 36% and 39.6% respectfully. The plan also calls for eliminating preferences for oil and gas companies, life-insurance products, executives of investment partnerships and U.S.-based companies that operate overseas.

“This set of tax reforms strikes a balance between targeted tax cuts to spur investments in job growth and innovation here at home, middle-class tax relief to make our tax system more fair, measures to crack down on abuses that send jobs overseas, and long-term fiscal discipline,” Treasury Secretary Timothy F. Geithner said in a statement.

Obama’s proposed $143.4 billion in new tax cuts for individuals who earn under $200,000. While the budget sets out $93.5 billion in gross tax reductions for businesses, overall they would face a net tax increase.

“The proposed budget’s $300 billion in tax relief over the next 10 years for individuals, families, and businesses is mostly targeted and limited, often to people who don’t have to pay any taxes,” said Senator Charles Grassley of Iowa, the ranking Republican on the tax-writing Senate Finance Committee. “The tax increases in the budget dwarf the tax relief.”

President Obama asked Congress to extend all of Bush’s tax cuts that apply to Americans earning under $250,000. He also proposes almost doubling a tax credit that helps Americans pay for child care and increasing federal subsidies for Individual Retirement Accounts.

The budget assumes the federal estate tax, which expired Jan. 1 and was replaced with a capital-gains tax, will be reinstated retroactively with a 45 percent rate applied when married couples’ estates exceed $7 million. If Congress doesn’t act, the estate tax in 2011 will be reinstated to a 55 percent rate applied to estates valued at more than $1 million.

Obama’s budget also assumes Congress will continue to index the alternative minimum tax for inflation. The minimum tax can impose higher rates on families earning between $75,000 and $500,000 when their deductions are too high relative to their income. It was originally intended to affect only millionaires and is now ensnaring people with lower incomes because it was never indexed for inflation.

The Obama tax budget proposal will most certainly face opposition from Congress.  This proposal will also be opposed by the influential and wealthy US taxpayers.  Is Obama’s tax proposal political hari-kari?

source: businessweek.com