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  • Damaging Policies Add Up to $1 Trillion Tax Increase in Obama Budget (UPDATED)

    Brendan Smialowski/AFP/Getty Images/Newscom

    Brendan Smialowski/AFP/Getty Images/Newscom

    UPDATE: The official total tax increase in President Obama’s budget is now available in the Treasury Department’s “Green Book.” Treasury scores the total net tax increase from all President Obama’s tax polices at more than $1.1 trillion over 10 years.

    There was little doubt that President Obama would propose a huge tax hike in his budget. It is a bit surprising, however, that the total tax increase he proposes is almost double what he claims it to be.

    The total revenue from all the tax increases he proposes, minus the minor tax cuts he proposes, totals about $1 trillion over 10 years. This is much higher than the $580 billion cited frequently in the media and claimed explicitly by the President.

    The bulk of that revenue comes from capping deductions and certain exemptions for high-income taxpayers and applying the President’s infamous and never-dying “Buffett Rule.”

    Capping Deductions and Exemptions

    The cap, since it applies to exemptions, would be a radical departure from long-established tax policy and would have serious negative consequence for retirement savings, employer-provided health insurance, and state and local bonds.

    It is bad policy because it treats all deductions as subsidies, when in fact many are necessary for good tax policy. The deduction for charitable contributions is a good example. Under an income tax, it is proper to allow a deduction for income donated to charity. If you earn income but donate it, you shouldn’t have to pay tax on it. This is why Heritage has a charitable deduction in The New Flat Tax. President Obama would violate this by reducing the charitable deduction with his misguided cap. As a result, the cap would end up hurting the institutions of civil society that are best at serving the neediest Americans.

    The “Buffett Rule”

    The Buffett Rule would further raise taxes on high-income taxpayers, but would end up hurting middle-income and low-income families by depriving them of wage growth and better jobs.

    Indexing Tax Brackets to Chained CPI

    President Obama also wants to change the way the IRS adjust tax brackets each year for inflation. The new method, chained CPI, would raise those brackets less than the current measure of CPI in any given year. This would push taxpayers into higher tax brackets sooner, resulting in a tax increase. Moving to chained CPI is the right policy in tax reform where Congress can offset the revenue it raises with pro-growth policies. It should not be used as a way to raise revenue, as the President proposes.

    Increasing the Death Tax

    One surprise in the Obama budget is that the President wants to significantly raise the death tax. Congress raised it to 40 percent with a more than $5 million exemption in the fiscal cliff deal earlier this year. After the protracted fight leading up to the fiscal cliff deal, one would’ve thought this was settled policy for the time being. Yet President Obama wants to raise the rate even higher to 45 percent and lower the exemption to $3.5 million. It is odd that President Obama would go back after the death tax since he himself signed its current parameters into law just three months ago.

    Capping Retirement Accounts

    In another alarming move, the President would cap the amount families could have in their retirement accounts at $3 million. This would force families who want to save more to pay taxes on income they otherwise would’ve saved in tax-deferred retirement accounts. This will mostly affect high-income earners, so is another salvo in President Obama’s never-ending class warfare. But as the President’s surprising move on the death tax shows, it could end up being the first step on a slippery slope to further restrictions on retirement savings.

    Taxes Hitting Poor and Middle Class

    President Obama didn’t leave out the middle class and the poor in his litany of tax increases, however. He also wants to raise the federal cigarette tax to pay for his “early childhood investments.” The cigarette tax falls heavily on the middle class and the poor.

    There are many other damaging tax hikes in President Obama’s budget. Since President Obama was so late to the budget debate, his entire budget is entirely irrelevant to Congress’s budget process. Hopefully Congress ignores all these troubling tax increases the way it will the rest of the President’s inconsequential budget.

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