President Obama's 2015 Tax Proposals

http://www.whitehouse.gov/sotu

The tax plan that President Obama released along with his State-of-the-Union speech has several new items that have not been in his list of tax proposals of the past few years. It seems that the proposal getting the most attention in the press is the one to cut back on the exclusion of gains that exist in assets at the date of death of the owner. This has been in the law for a long time and people with highly appreciated assets count on it to maximize their estate and what they can leave to their heirs and others.

A few observations:

• Per the Joint Committee on Taxation 2014 report on tax expenditures, this exclusion "costs" about $32 billion per year.  The revenue raised would likely be less than this as President Obama says some assets will be exempt from the income hit, such as:
  
  Capital gains up to $100,000 per individual.
  Exemption for a home of $250,000.
  Bequests of clothing and small family heirlooms.
  
  Of course, the above if fairly nominal and most individuals will die without having the exempted amounts noted above. The big hit is for wealthy individuals.  President Obama notes that the proposal should reduce the current incentive to hold onto assets rather than sell them so this could have some positive effect on the market and economy.  He is likely also trying to address the growing reality that most wealth is in the hands of a small number of individuals. Seems he would use the funds generated to help pay college costs of more individuals. Something likely good for the economy.
• What happened to his proposal to limit the tax benefit of itemized deductions, tax-exempt interest income and the exclusion for employer-provided health coverage?  He estimated that would raise about $62 billion per year (see FY2015 Greenbook, page 282).

What will be the next steps?  If tax reform is going to happen something this year or next, the tax committee members will need to work with President Obama to set goals for reform and find common ground.

I think everyone will also have to get past the notion that some of our longstanding tax breaks need to stay.  The only ones that really need to stay is the standard deduction and personal exemptions as they serve to ensure that some amount of income is untaxed as people need it to live on. The untaxed step-up in basis at date of death, the mortgage interest deduction, exclusion for employer-provided health care, property tax deductions on multiple homes and beyond the value of a basic home, and many others are not crucial for raising revenue (which is the purpose of tax). Their removal would make the system simpler and allow for a lower rate.

What do you think?