TPC’s Analysis Of President Obama’s 2014 Budget

by Burr & Forman

The Tax Policy Center (the “TPC“) has published its analysis of the tax proposals included in President Obama’s 2014 budget.  The analysis finds that President Obama’s proposals would have the intended effect of “significantly [raising] taxes on the highest-income American households.”  At the end of the day, the TPC concludes that all taxpayers, including those making below $200,000 (or couples making $250,000 or less), a group President Obama has consistently vowed to protect from tax increases, would pay slightly more tax than under existing tax law.

Taxpayers making $1 million or more.  The TPC analysis estimates that nearly everyone in this category would pay more tax in 2015, with the increases averaging almost $83,000.  The President’s 2014 budget would increase the average federal tax rate to just over 41%, or approximately 2.3% above existing effective rates.

It is estimated that taxpayers making $1 million or more would pay nearly 60% of the tax increases and those with income of $200,000 or more would pay approximately 86% of the new taxes.

“Middle-Income Households.”  Taxpayers considered to be “middle-income” would also pay more tax than under existing law, although the increase is not significant.  Taxpayers whose income falls in the $50,000 – $75,000 range would have an average tax hike of about $63 in 2015, which translates into a reduction in their after-tax income of 0.1%.  All in all, households in this income range would pay about 2% of the tax increases, while representing about 16% of all taxpayers.

Households with income between $100,000 and $200,000 would pay, on average, about $150 more, which results in about a 0.1% reduction in their after-tax income.  These households comprise about 14% of all taxpayers and they would pay about 4% of the proposed tax increases.

The President’s budget indexes the tax increases for inflation using a system referred to as the “chained CPI.”  The effect of the chained CPI is that middle-income households would pay a larger share of their taxes in about 10 years.  Households with income in the $100,000 – $200,000 range would, on average, pay about $380 more in 2023, compared to the $150 increase estimated for 2015.  This results in that group of taxpayers now being responsible for about 7% of the increased taxes (up from 4% for the same group in the year 2015).

For “high-income” taxpayers, the President’s budget would limit the value of itemized deductions and some other “tax preferences” to 28%.  The President’s budget also proposes to impose taxes on tax-deferred retirement accounts having a value in excess of “about $3 million.”  The budget would implement the “Buffet Rule,” meaning that a minimum income tax of 30% would be imposed on any taxpayer having an adjusted gross income of $1 million or more.

Who is the TPC?  The Tax Policy Center is a joint venture of the Urban Institute and the Brookings Institution.  Its members are proclaimed to be “nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government” (taken from the TPC’s website).

If you would like to discuss any of these issues, or would like more information on business succession planning, please contact a Burr & Forman Business Planning and Succession team member.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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