President Obama recently announced plans to create a $630 billion “health care reserve fund” to provide health insurance to the more than 40 million uninsured Americans. Most costs would be assumed by higher income taxpayers in the form of (i) a 39.6 percent tax rate for married couples whose income exceeds $250,000; (ii) a 28 percent cap on itemized deductions (meaning that high income taxpayers will not receive a full deduction for mortgage interest, state and local taxes, and charitable deductions); and (iii) a new capital gains rate of 20 percent.
Mr. Obama advocates increasing corporate tax revenues by eliminating tax provisions which enable companies to defer paying tax on overseas profits provided those profits are reinvested in foreign subsidiaries. Such a change would increase the effective multinational tax rate by 6 percent to 32 percent and provide $210 billion in tax revenues. A Treasury Department official said the Obama administration wants to keep U.S. firms competitive, but remove tax code “distortions” that cause a firm to shift jobs overseas. Republicans and some Democrats feel that increasing the effective corporate tax rate is will stifle corporations.
Mr. Obama has requested that Congress increase the IRS budget by 8 percent to $5.5 billion in the fiscal year 2010 to strengthen tax enforcement and increase collections. The President plans to establish a task force, headed by former Federal Reserve Chairman Paul Volker, to narrow the “tax gap,” which is the difference between tax which is owed and tax which is paid. $100 billion of the $300 billion gap is thought to be collectible. Mr. Obama also wants the IRS to increase enforcement efforts. This could mean more tax audits.
The $787 billion economic stimulus package passed by Congress in February provides more than $71 billion in energy investments, infrastructure and transportation improvements, environmental clean-up and clean water investments, and scientific research. Climate change funding appears to be less of a priority to President Obama than health care reform. Long-term AMT relief appears unlikely at this time.
Senator Max Baucus (D-Mont), Chairman of the Senate Finance Committee, recently introduced legislation that would freeze the estate exemption amount at $3.5 million, and freeze the maximum estate and gift tax rate at 45 percent. The proposal would reunify the estate and gift tax, thus allowing lifetime gifts of up to $3.5 million before gift tax liability arises. (Currently, gifts in excess of $1 million require payment of gift tax.) The bill would also allow “portability” of the exemption, so that a surviving spouse could utilize the unused exemption amount of the predeceased spouse. Estate and gift tax laws would also be revised to require a consistent valuation of property for income and transfer tax purposes.
The administration also advocates changing tax laws involving investments in hedge funds. U.S. banks have utilized complex swaps to enable foreign investors to benefit from investing in the U.S. stock market without paying a 30 percent withholding tax.