The $3.78 trillion federal budget proposal President Barack Obama introduced today would lean on high-income earners to help cut the government's budget deficit.
Mr. Obama's budget incorporates $580 billion in tax hikes, including an increase in estate taxes.
One feature: Resetting the estate tax with a $3.5 million exemption and 45% rate. Three months ago, as part of the fiscal cliff deal, Congress agreed to set the estate tax exemption at $5 million per couple and the rate at 40%. Under Mr. Obama's plan, the estate tax would not be indexed for inflation.
Even though the president made a similar estate tax proposal in last year's budget, one investment adviser was surprised to see it included again this year, especially after the congressional agreement in the issue in the fiscal cliff legislation.
“Most planners thought the estate tax was a settled issue,” said Tim Steffen, senior vice president and director of
financial planning at Robert W.
Baird & Co. Inc. “Lowering the exemption to $3.5 million and removing the inflation index brings a lot of people back into owing estate taxes who thought they were exempt. The number of people subject to it will continue to grow.”
In addition, Mr. Obama's budget would implement the so-called Buffett Rule, which would require that households earning at least $1 million a year pay a 30% ordinary-income-tax rate or higher, not including charitable deductions.
Other tax provisions would:
' Limit tax deductions — including those for mortgage interest, retirement savings incentives and municipal bond income — to 28% for high earners.
' Tax carried interest from investment funds as ordinary income rather than at the lower capital gains rate.
' Cap at $3 million the amount of money that can accumulate in tax-favored retirement accounts.
The Securities Industry and Financial Markets Association expressed concern about another budget proposal that would require the annual reporting of a gain or loss from a derivatives contract.
“The mark-to-market proposal would impact the routine investments of ordinary investors, many of whom are not at all wealthy or sophisticated but who may have derivative exposure due to holdings in mutual fund shares, exchange-traded notes [and] exchange-traded funds, among other things,” Kenneth Bentsen Jr., acting SIFMA president, said in a statement.
Mr. Obama also proposed a series of tax breaks for middle-income Americans and small businesses, as well as spending cuts. The budget would achieve $1.8 trillion in deficit reduction over 10 years — enough to replace about $1.2 trillion in sequestration cuts that have started taking effect.
The president's budget enters the game late on Capitol Hill. Last month, the Democratic-majority Senate approved a budget blueprint that would increase taxes by nearly $1 trillion, while the Republican-controlled House passed a budget outline that would not raise any taxes and focuses exclusively on spending cuts.
On Wednesday, House and Senate Republicans came out against Mr. Obama's budget, ensuring that even a modified version would face a fierce uphill battle for approval.
But the struggle would be worth it, according F. William McNabb III, chairman and chief executive of the Vanguard Group Inc.
In an appearance at the U.S. Chamber of Commerce's Capital Markets Summit on Wednesday, Mr. McNabb called on lawmakers to set a specific timetable and plan for deficit reduction. He said that uncertainty over the country's fiscal situation has helped contribute to a reduction in economic growth of approximately 2% over the last two years.
“You can't kick the can down the road any longer,” Mr. McNabb said. “In fact, it's not a can. It's a barrel. I think it's the issue of our generation.”
