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A first look at Obama's budget proposal

Low- and middle-income workers will see tax cuts, with hikes for the wealthy.

February 27, 2009|Frank James

WASHINGTON — President Obama's $3.55-trillion budget proposal includes tax cuts for some and increases for others. More details are expected in April.

Here's a first look.

Who would get a tax cut under the plan?

The budget would make permanent the Making Work Pay tax credit for low- and moderate-income earners. Single taxpayers are eligible for a $400 credit; married couples filing jointly are eligible for double that.

The credits phase out for individuals who make $75,000 or more and for couples making $150,000 or more.

The tax credit, meant to offset some or all of a worker's payroll taxes, was signed into law for two years as part of Obama's economic stimulus package. The budget would make it permanent.

For small businesses, the capital gains tax would be eliminated.

Whose taxes would go up?

Bush administration tax cuts for the highest-earning taxpayers, such as families earning more than $250,000 a year, would be allowed to expire in 2011. The highest income tax rate would revert to 36% for individuals and 39.6% for married couples, from the current high of 35%.

The Obama budget also would reduce the rate that the highest-earning Americans use to determine their itemized tax deductions. Currently, wealthy Americans get to write off 35 cents for every dollar of their deductible expenses. Obama would reduce that to 28 cents.

That would include deductions on mortgage interest.

Capital gains taxes on the highest-earning Americans would increase to 20% from the current 15%.

Clint Stretch, managing principal for tax policy at Deloitte, crunched the numbers and determined that under the president's plan, a single person with no children with $500,000 in household income would pay an additional $19,200 in taxes. A married couple with the same income and two children under 17 would see a tax increase of $11,300.

What about businesses?

Many businesses would also see their taxes rise. The administration wants to raise about $210 billion over 10 years by tightening tax enforcement for U.S. companies with international operations and tax policy reforms.

Oil and gas companies would see their taxes rise about $31.5 billion over a decade as the administration eliminated various tax preferences and placed an excise tax on drilling in the Gulf of Mexico.

Another big change would affect hedge funds whose managers' incomes are now taxed at the lower capital gains rate of 15%.

Obama would make their earnings taxable at the ordinary income tax rate, raising $23.9 billion over 10 years.

And administration officials estimate the cap-and-trade system that the administration would implement to reduce businesses' greenhouse gas emissions -- not technically a tax -- would raise $645.7 billion over 10 years.

hat was the reaction to the tax changes specified or implied by the president's budget?

Liberal advocacy groups welcomed the changes and praised the budget for addressing healthcare and global warming.

Congressional Republicans decried the changes, saying raising taxes on the highest-income earners would harm small businesses and job creation, especially during a time of deep recession.

Sen. Judd Gregg (R-N.H.), who withdrew his nomination as Obama's Commerce secretary-designate over differences with the president on the stimulus, said the cap-and-trade program would affect everyone in the country.

"You've got a tax on people's electric bills here. Everybody who gets an electric bill in this country who happens to be in a region where there are coal-fired plants or other plants subject to a carbon limitation tax, they're going to be getting a big tax on their energy bills," Gregg said.

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fjames@tribune.com

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