Winners and Losers Under Obama’s New Tax Plan

by Darwin on February 2, 2010

Monday, the administration released their budget plan which was purported to reduce the tax burden on middle-class Americans.  There will be clear winners and losers under the plan, so here are the high points:

Winners

  • Making Work Pay tax credit—$400 for individuals, $800 for a couple filing jointly—through 2011.  This was already in place for 2009, 2010.
  • Middle Class Income Taxes – Extending the tax cuts enacted under Bush for families making less than $250,000 and individuals making less than $200,000.
  • Hiring Businesses – Budget would give companies a $5,000 tax credit for each new worker they hire in 2010.  Businesses that increase wages or hours for their current workers in 2010 would be reimbursed for the extra Social Security payroll taxes they would pay.  I question how helpful the second part is.  Would this just make companies rethink a new hire since they could employ overtime for less money now?  Some new hire decisions on the fringe may suffer.
  • Research Outfits – Make the research and experimentation tax credit permanent, saving businesses about $83 billion over the next decade.
  • Business Capital Outlays – Extend a provision allowing businesses buying equipment such as computers to accelearte depreciation through 2010, saving them $20 billion over the next decade.

Losers

  • High Income Earners – Raise the top two income tax rates for individuals, from 33 percent and 35 percent, to 36 percent and 39.6 percent, respectively.  Result: nearly $1 trillion in higher taxes on couples making more than $250,000 and individuals making more than $200,000 by not renewing Bush-era tax cuts for them.
  • Investors - Increase the top capital gains tax rate from 15 percent to 20 percent for families making more than $250,000 a year and individuals making more than $200,000.  This may have a gradual impact on stock market returns.  With a higher capital gains rate, high net worth investors may shift to other assets with a more desirable net return profile.
  • Oil and Gas Companies & Multinationals - Increase taxes on U.S. companies with major overseas operations, and plans to increase taxes on oil and gas companies to the tune of about $39 Billion over the next decade.  Also, restrict the ability of international companies to defer taxes on profits made overseas, raising about $26 billion over the next decade.
  • Charities – Since many charities rely on contributions from high income earners, the new limit on itemized tax deductions high earners can claim for charitable donations, mortgage interest and state and local taxes, will likely hurt.
  • Banks/Financials - Enact a “financial crisis responsibility fee” on large firms that may be “too big to fail”, raising $90 billion over the next decade.
  • Fund Managers – Change the way profits by investment fund managers are taxed, raising an additional $24 billion over the next decade.


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Thoughts on these proposals?

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{ 11 comments… read them below or add one }

1 Jim February 2, 2010 at 2:56 pm

Good summary.

Don’t mean to be nitpicky but: Not all “Investors” would be losers due to that change in fact most of us wouldn’t be impacted. It would be more accurate to say: “Investors who are High Income Earners”.

[Reply]

2 Darwin's Finance February 2, 2010 at 3:07 pm

Hi Jim,
Tx for comment. I had qualified with why I felt all investors would suffer gradually under an overall impact to equities. When you tax something more, you get less of it, even if taxing a select population. I would envision this can only be a net negative for equities as opposed to a positive (that provision specifically).

[Reply]

3 Reputo February 2, 2010 at 3:31 pm

You list charities as losers in this scenario. That doesn’t line up with your earlier post on good deeds. Do you mind elaborating on this? Is there some data which shows that charities recieve less as a result of decreased deductions (as opposed to slower economy)?

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4 Kate February 2, 2010 at 4:01 pm

Charities are definitely going to be losers with this plan and I do agree there needs to be higher taxing on these fund managers, the amount of money they make is ridiculous. I don’t agree about not extending the tax cuts to those who make higher incomes. I do not fall into that category but my sister and her husband will most likely be impacted. They work hard for their money!

[Reply]

5 Financial Samurai February 2, 2010 at 4:37 pm

I feel bad for charities, and also everybody under this plan. Who do you think hire the middle class? The $250,000+ small business owner and the rich.

I don’t understand why Obama is so anti-charity/anti-giving/anti the poor. He should want to help the poor.

[Reply]

6 Darwin February 2, 2010 at 10:17 pm

Hi Reputo,
I actually don’t see a conflict between the two articles. The “good deed” article’s point was that the rich give because they want to, not because they have to. I highlighted how people misunderstand the tax code and the motives of the these rich donors. But people do respond to incentives – think of it as a continuum. There will be rich who give the same no matter what the tax situation is and there will be others that are on the fringe and say, “I’m not going to donate [as much]” because of the reduced tax benefit. These fringe donors hurt when it adds up to Billions per year.

When you tax something, you get less of it. When you provide an incentive, you get more of it. This is human nature.

With respect to data, obviously, there are no clinically controlled double-blind studies of “rich person behavior” when tax increases are enacted since a) we don’t change the tax code often and b) there are usually many forces at work, including the economy, whether a massive disaster struck recently, etc (Katrina, 9/11, etc elicited large donor dollars compared to quiet years). However, for an authoritative stance on the issue of what Obama’s tax proposals will do, check out what the Indiana University Center on Philanthropy has to say on it. They predict Billions per year in impact:

http://philanthropy.com/article/Obamas-Tax-Plan-Could-Cause/63028

[Reply]

7 Ernieccy February 3, 2010 at 5:33 pm

Obama annually must submit a Budget to Congress for approval. This Fiscal Year Tax Revenues are about $2.2-Trillion and Spending is about $3.8-Trillion a short fall of $1.6-Trillion. For those of us who have forgotten, a Trillion Dollars is One Million – Millions.

So, now how does he close that Revenue v. Spending gap and still stay popular with the voters?

He must eliminate as must spending as he can, and he must eliminate as many tax deductions as possible.

Or, take the high risk road of suggesting raising taxes in the worst recession of the last 80-years; not a popular or prudent move to make.

The Structural Deficit (2 wars, Part D Medicare, Medicare, Medicaid) accounts for $1.5-Trillion of annual overspending.

So now he has the tough part of the Presidency, who to cut back upon (the elderly, the sick, the infirmed) and whom to target for tax increases.

[Reply]

8 finance February 3, 2010 at 11:24 pm

I should say you’ve made a good summary, there are really people that will benefit from Obama’s Tax plan. But more are suffering from it. I don’t know which is better since In your list i’m in the winner side of Obama’s new Tax plan. These is a really good post

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9 Kosmo @ The Casual Observer February 6, 2010 at 11:28 am

“Businesses that increase wages or hours for their current workers in 2010 would be reimbursed for the extra Social Security payroll taxes they would pay. I question how helpful the second part is. Would this just make companies rethink a new hire since they could employ overtime for less money now?”

Maybe if they just needed a few extra hours … but it wouldn’t seem to make sense to pay 40 hours of OT per week (split across a couple of workers, I assume) because the cost of those 40 hours would be at time and a half (150%). I’m assuming the companies would just be reimbursed for their share of the payroll takes (7.65%), which is substantially less than the increase in wages.

Even when throwing in the cost of benefits, you probably come out ahead with the new employee, esp with the $5000 credit for hiring them.

[Reply]

10 Adam@RabbitFunds February 17, 2010 at 1:58 am

Great outline of the impact of Obama’s plan. Almost makes me glad that I’m not in the high income tax bracket (almost).

[Reply]

11 Lån penge July 26, 2010 at 8:22 am

Thanks for a very informative debate and talk.
I guess no matter what you do, it have sme up and down sided.. But i think this it difinetly a step in the right direction for America.

[Reply]

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