President Barack Obama's tax bill was unveiled with great fanfare last week. But support for his ideas was muted at best. The president says his financial plan would pay for his jobs bill and, over the next decade, reduce the federal deficit.
But because Obama's proposal includes taxes, he's going to have a hard time getting it approved by Congress. While some of his ideas might appeal to the Democrats on the Joint Select Committee on Deficit Reduction, they in turn will face a challenge incorporating taxes into the proposal they must come up with by Nov. 23.
As the debate continues and that deadline nears, here's a look at some of the plan's key points and who wins and loses.
Obama's individual tax proposals would:
- Allow the Bush-era tax rate cuts for higher-income earners to expire, making the top individual income tax rate 36.9 percent.
- Institute the "Buffett Rule" to add a new tax rate for households making more than $1 million a year.
- Reduce the value of itemized deductions to 28 percent for high-income taxpayers.
- Expand the current 2 percentage point employee payroll tax cut to a 3.1 percent rate -- half of the usual 6.2 percent rate -- for 2012.
- Return the estate tax limits to 2009 tax year levels: a $3.5 million exclusion and a 45 percent rate on estates worth more than that.
Higher tax rates for higher earners
Most of the president's individual tax proposals would affect higher-income earners. This is no surprise, since that was part of his campaign for the Oval Office. The two top individual income tax rates are set to increase from 33 percent and 35 percent to 36 percent and 39.6 percent, respectively, in 2013. That schedule remains in Obama's latest proposal.
That continued focus on richer taxpayers is why the president's plan is "DOA in the House of Representatives," says Jamie Cox, managing partner of Harris Financial Group in Richmond, Va.
"It might have a fighting chance in the Senate," says Cox, but Obama probably would have more success on Capitol Hill by suggesting some increase in revenue based on doing away with tax expenditures, those tax deductions and credits that cost the U.S. Treasury money.
Those, too, are in the Obama plan but again focusing on wealthier taxpayers. Higher earners who itemize would find the value of their deductions reduced to only 28 percent of their worth.
Higher earners previously faced a limit on their itemized deductions, but that was a phaseout method. "As you went up in income, it could be a pretty good bite," says Bill Smith, managing director in the national tax office of CBIZ MHM in Bethesda, Md. "But this is a flat cap if you meet the income limits, so it's immediate from dollar one."
Millionaires would pay more
Then there's the Buffett Rule, named after renowned investor Warren Buffett who complained he and his rich peers don't pay enough taxes. It would create a higher tax rate for those making $1 million or more, and it has been equally applauded and lambasted.