Thursday, February 4, 2010

Taxing the "Rich" and More Marriage Penalty

Comments on the President's statements about taxes during his State of the Union Address.

The top two income-tax rates, which affect people earning more than $200,000 a year, or $250,000 for married couples, will return to 36% and 39.6%, from 33% and 35% now. Under the budget plan, capital gains and dividends would be taxed at 20%, up from 15% now, for people at those income levels. Limits on upper-income people's ability to claim personal exemptions and itemized deductions will also snap back next year, without any action needed from Congress.

But as in last year's budget, Mr. Obama proposed Monday to go further by limiting the value of those benefits, which include deductions for mortgage interest and some charitable contributions. The highest-income earners under current law can lower their taxes by up to 39.6% of those deductions; under Monday's proposal, that would be reduced to 28%. The bid to lower the limit on itemized deductions stalled in Congress last year amid strong resistance from Democratic and Republican lawmakers.

It is also opposed by a battery of interests including Realtors and charities. Fund managers would see their partnership profits taxed at ordinary income rates, rather than the lower capital-gains rate, under Mr. Obama's proposals. That plan—also proposed in last year's budget—passed in the House but has had trouble getting off the ground in the Senate, where lawmakers of both parties worry that a tax increase on so-called carried interest could harm entrepreneurship and investment.

Supporters of the president's plan say it is unfair that fund managers' income should be taxed at a lower rate than wages. Mr. Obama proposed reinstating the estate tax, which was repealed for one year on Jan. 1, at the levels in effect last year—or 45%, with an exemption for estate wealth under $3.5 million—and extending those rates permanently.

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