2012 -0213 Obama’s budget today

Obama’s budget announcement today – not a surprise

Proposed 2013 budget would reduce dividend tax break, impose new rules, and raise top marginal rate to almost 40%

The $3.8 trillion budget that President Barack Obama proposed today for 2013 would generate $1.4 trillion in new taxes for the wealthy.

Perhaps the only surprising element of the proposal puts dividends paid by high-income Americans at ordinary income, boosting the rate paid to 39.6% from a current rate of 15%.

The higher rates would apply to couples making $250,000 or more and individuals making $200,000 or more IF they earn significant income from dividends.

Originally, the president had supported continuing to tax dividends at a favorable rate, but administration officials said Mr. Obama decided the nation couldn’t afford it.

“We don’t need to be providing additional tax cuts for folks who are doing really, really, really well,” Obama said today in a speech at Northern Virginia Community College.

This is not news, in 2003, dividends were taxed as ordinary income.

Not surprisingly, Republicans in Congress immediately criticized the president’s budget and predicted failure for the tax increases wanted by the White House. .

The change in dividend taxation would raise $206.4 billion over a decade, according to the administration, which has said the wealthy need to pay more to help the nation control its deficit and spur economic growth.

The president’s proposal would end the Bush era tax cuts and limit tax deductions to 28% for wealthy Americans, again defined as those couples earning $250,000 and individuals making at least $200,000.  Limits them to 28% but does not eliminate them. These high-income earners already were set to take a hit in next year when a provision of the 2010 health care law kicks in that will tax their unearned income at 3.8%.

The administration’s proposed budget also would boost the top capital gains tax rate to 20% from today’s top rate of 15% and the income tax rate would max out at 39.6% in 2013 (increased from 35%). As expected, the plan also would tax private-equity managers’ profits-based compensation at ordinary income rates (which it is) instead of the 15% current capital gains rate.

The president’s budget also sets a new rule called the “Buffett rule,” that would set a 30% minimum tax for individuals with $1 million or more of annual income, a proposal that’s been discussed since last year after billionaire Warren E. Buffett said the wealthy weren’t paying enough in taxes. That tax would replace the alternative minimum tax (AMT), which the White House contends hits the middle class instead of its goal of keeping the richest Americans from paying too little.  It is great if it replaces AMT.

Republicans do control the House and wield significant influence in the Senate so it’s unlikely that Obama’s budget will make it out of Congress but only time will tell.