The short version is that President Obama is pushing absolutely staggering increases through the corporate and business tax systems. Direct taxes on business are, in general, inefficient and economically disruptive, but they are also peerless in their complexity, which means that few voters and essentially no reporters will make the effort to understand what is being done to them.
Trust me on this: something awful is being done to you.
Anyway, here are the most irritating (though not necessarily the most consequential) bits from the Deloitte Tax write-up, with my occasional commentary:
Introduction
More than two months after releasing its FY 2010 budget blueprint and a week after unveiling a set of provisions to reform the international tax rules, the Obama administration on May 11 provided a comprehensive description of its tax proposals for the coming fiscal year. This latest budget document describes more than 40 new provisions ranging from additional penalties or information reporting to dramatic new tax increases on businesses and estate tax reforms....
The detailed budget package also proposes to make a down payment on health care reform – one of President Obama's top legislative priorities for this year – through a nearly $326 billion "health reform reserve fund" of corporate and individual revenue raisers. The centerpiece of this reserve fund is the provision included in the February budget outline that would limit the rate at which itemized deductions reduce tax liability to 28 percent for single taxpayers earning over $200,000 a year and joint filers earning over $250,000.
Information reporting
Starting small, one of the persistent themes is to massively increase the government's surveillance of small or even trivial transactions with the hope of improving tax collection in the little corners of the economy. The problem, of course, is that the new reporting requirements on businesses and individuals are "free" to the government, but not free to the economy. See, e.g.:
Information reporting on payments to corporations – The proposal would modify existing rules regarding reporting of payments made to corporations. It would require a business to file a Form 1099 to report payments made to a corporation totaling $600 or more in a calendar year. Notably, this provision was included in the Bush administration's FY 2008 and FY 2009 budgets, but was not enacted. The provision would be effective for payments made after December 31, 2009, and would raise an estimated $9.15 billion over 10 years.
Information reporting and withholding for contractors – The provision would require a contractor receiving $600 or more from a business to provide a Form W-9 with the contractor's TIN. The business would be responsible for verifying the TIN information with the Internal Revenue Service, which would validate the TIN. Should the contractor fail to provide the appropriate information, the business would be directed to withhold a percentage of gross payments. The flat-rate withholding could be at a rate of 15, 20, 30, or 35 percent, to be selected by the contractor. The proposal would raise $704 million over 10 years, effective for payments to contractors after December 31, 2009....
Are you a landlord? Do you maybe own an investment property, or a summer place that you rent to others, or perhaps you could not sell your last house so you are renting it instead? Well, you're really going to hate this one:
Recipients of real estate rental income that make payments of $600 or more to a service provider (such as a plumber or accountant) in the course of earning rental income would be required to send an information return (generally, Form 1099-MISC) to the IRS and to the service provider. Exceptions would be made for particularly burdensome situations, such as for taxpayers (including members of the military) who rent their principal residence on a temporary basis, or for those who receive only small amounts of rental income. The proposal would be effective for tax years beginning after December 31, 2009, and would raise about $3 billion through 2019.
Of course, not only will this create bureaucratic hassles for small landlords, but it will significantly raise the costs of hiring local tradesmen, who will suddenly learn that they no longer work in a "cash business." That may be fair -- electricians, plumbers and carpenters should not cheat on their taxes -- but this seems like the wrong time to be imposing big new costs and other disincentives on landlords.
Punitive damages
The administration believes the deductibility of punitive damages undermines their role in discouraging and penalizing undesirable actions, and this proposal would disallow all deductions for punitive damages paid or incurred by a taxpayer on judgment or by settlement of a claim. The proposal would also extend to punitive damages covered by insurance. The damages paid or incurred by the insurer would be included in the insured's gross income, and the insurer would be required to report the payment to the insured and the IRS. The proposal would apply to punitive damages paid or incurred after December 31, 2010.
There is a certain logic to this, if you believe that punitive damages assessed by juries amount to the fair dispensation of justice. It is also a load off for the Democrats, because they no longer have to worry that their friends in the trial bar will reduce the revenue available to them to spend.
Foreign taxes
There are a whole slew of complex foreign tax proposals that, in the aggregate, will make U.S. companies even less competitive in foreign markets and discourage foreign companies from doing business here.
The administration has proposed substantial changes to the U.S. international tax regime that, if enacted as proposed, would expand the reach of the federal tax code and raise the cost of doing business in the United States. These proposals generally would become effective in 2011 and would raise some $210 billion over 10 years, according to Treasury Department estimates.
Raise money for Congress to spend and throw a sop to the protectionists at the same time, all in a manner so complex that the press could not call you out even if it were so inclined. Can it get any more audacious than that?
Energy
If you are an energy producer, the hits just keep coming.
The budget proposal contains revenue-raising measures that will have a substantial impact on the oil and gas industry. Together, they generate more than $31 billion in revenue over 10 years. In addition to imposing new taxes, the administration is also seeking to repeal tax preferences that promote oil and gas production, arguing that: (1) they distort markets by encouraging more investment in the oil and gas industry than would otherwise occur; (2) to the extent that they result in the overproduction of oil and gas, preferences are detrimental to long-term energy security; (3) preferences are inconsistent with the administration's policy of reducing carbon emissions and encouraging the use of renewable energy sources; and (4) because they ultimately are financed with taxes, preferences result in underinvestment in areas of the economy that potentially are more productive.
Well, you (not really meaning you per se) voted against "drill here, drill now," so now we have "don't drill, or only at a much higher cost." Then there is the "reinstatement" of the old Superfund tax:
The administration proposes to raise $17 billion over 10 years by reinstating taxes that were originally enacted in 1980 to finance the cost of cleaning up toxic waste sites and allowed to expire. The superfund taxes included: (1) an excise tax of 9.7 cents per barrel on crude oil received at a U.S. refinery and on each barrel of imported petroleum products; (2) an excise tax of varying amounts on certain hazardous chemicals sold in the U.S. or used in substances imported into the U.S.; and (3) an environmental tax of 0.12 percent on the amount by which the modified alternative minimum taxable income of a corporation exceeded $2 million. These taxes would be reinstated for tax years beginning in 2011.
Taxing the "rich"
Apart from the indirect impact of all these new corporate taxes and bureaucratic burdens (most of which I have not included in this post), the Obama administration proposes raising marginal tax rates for single people who earn more than $190,000 and married couples making more than $231,000 (down, I note, from the $250,000 promised during the campaign). The top federal income tax rate, all in, goes to 40.79%. Of course, if that is wage income add more than 1% for Medicare tax and your state tax rate (adjusted for the associated federal deduction). I am fortunate to report that my marginal rate from only those three taxes will reach approximately 46%. Of course, President Obama's nattering about health care has massively reduced both my income and my net worth, so I'm not sure he is going to break even in the deal, but that's his doing, not mine.
Conclusion
As expanded by this latest release, the Obama administration's tax program has taken on an everything-but-the-kitchen-sink quality. One lesson here is never to underestimate the energy and persistence of this administration. But even though some new details on previous proposals were contained in this release, particularly on the international tax provisions, this document seems to raise as many questions as it answers.
Additionally, many of the groups that the administration has criticized in the press in recent months – financial institutions, insurance companies, oil and gas companies, private equity and hedge funds, and high income/high net worth taxpayers –
will find that this budget only further underscores those sentiments.
The lesson of that last paragraph is this: If Barack Obama is bashing somebody in his speeches, he is preparing the media battlespace for a substantive attack to come. It turns out that it matters very much what he sa
TigerHawk (12 May 2009)
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