President Obama escalated his tax battle with Republicans on Monday, submitting a budget to Congress that would nearly triple tax rates on dividend income.
Obama had telegraphed his so-called Buffett Rule to impose a minimum 30% tax rate on million-dollar earners. But his new thrust also aims at investors with incomes well below the stratosphere — $200,000 for singles and $250,000 for couples.
The proposed increase would boost the top rate on dividend taxes from 15% this year to 43.4% next year. That includes a new proposal to tax dividends at the same rate as regular income — 39.6% if Obama succeeds in ending the Bush tax cuts that dropped the top rate to 35%. It also includes a 3.8% tax on nonwage income that officially goes to Medicare but was really passed to help pay for Obama's signature health law.
Obama's continued shift to the left has come right on time for campaign season and seems to underscore the political risk highlighted by Standard & Poor's when it downgraded the U.S. credit rating last August.
Having upped the ante on taxes compared to his debt-ceiling negotiating stance last summer, how fiscal talks might play out in a second Obama term has become even less certain.
Meanwhile, Republicans have shown little willingness to compromise on taxes, insisting that spending is the problem.
Investment Gains Targeted Higher taxes on dividends are projected to raise $206 billion over a decade, a big chunk of $1.6 trillion in net tax increases proposed in the new budget.
The White House continues to call for a 20% rate on long-term capital gains, up from 15% since 2003. Including the 3.8% Medicare tax that's set to take effect in 2013, the capital gains rate would rise to 23.8%.
Beyond higher marginal income tax rates, other increases include higher estate taxes, a limit on itemized deductions for upper-income taxpayers and a variety of other international and business tax changes.
Not included in the $1.6 trillion are taxes under ObamaCare nor an end to the 2% payroll tax cut, which has saved taxpayers about $120 billion a year. Including those, Obama's policies would boost tax revenue by about $320 billion, or 1.75% of GDP in 2015.
The White House budget does not incorporate any extra revenue from the Buffett Rule. Instead, the Obama administration signaled its intent to use increased investment taxes on million-dollar earners to offset revenue raised by the much-despised alternative minimum tax.
It's not clear how much the Buffett Rule would raise, given the increase in investment taxes proposed separately. But whatever it did raise would be on top of the budget's $1.6 trillion in tax hikes.
Higher taxes on investment income would tend to push up the cost of capital for corporations, which would be a negative for growth.
The White House signaled that it plans to outline a proposal for reducing corporate tax rates in coming weeks. It's not yet clear whether the corporate tax reform proposal would offset, to some extent, the higher capital costs.
The White House assumes considerably stronger economic growth than the Congressional Budget Office and tax hikes that gradually raise revenue to a near-record 20% of GDP. Still, the deficit would never fall below 2.7% of GDP, or $575 billion in 2018.
Republicans were quick to note that even after all the tax hikes proposed on higher earners, the White House would need to raise taxes on the middle class to pay for all of its proposed spending.
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