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Tuesday, January 27, 2015

President Obama's 2015 Tax Proposals
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?


Unknown said...

How about tax exemptions for college savings, colloquially known as 529 plans?

It sounds like the general public isn't ready (or willing) to give up its tax breaks very easily. I read yesterday that the President's proposal to end the college savings exemption is being dropped after facing a lot of pressure from both sides. The "middle class" is used as a crutch to suport the 529 plans yet according to the Ney York Times article on 1/27/2015, over 70% of taxpayers benefiting from this provision have household income greater than $200,000.

What is middle class anymore?

Anonymous said...

My main reaction has been journalistic: abhorrence of the way the budget proposals were reported in the news media Sunday. The White House hosted a conference call with reporters, who presumably were also given at least an outline. Most news organizations included in their report direct quotes that were attributed only to "a senior White House official" but that conveyed only self-evident observations or partisan, tendentious arguments. I wish all journalists would limit their use of anonymous sources to ones with exclusive information where the information's public interest outweighs the need for readers to know the speaker's identity (with appropriate safeguards for trustworthiness and credibility). There's no need for anyone conveying essentially the same talking points as Josh Earnest, the White House press secretary, to require reporters to stipulate to "deep background" anonymous attribution. To its credit, the New York Times didn't use the quotes, but CNN, Reuters, Bloomberg-BNA, and others did.