Don't Mess With Taxes

By now you've seen the highlights of Obama's fiscal 2013 budget. Depending on your fiscal and/or political leanings, it's a solid financial hybrid of stimulus and deficit reduction efforts or simply a document filled with monetary gimmicks.

There is, however, one thing everyone can agree on: There's not much new in this budget.

The president has put forth most of his FY13 tax proposals before, both on the campaign trail in 2008 and each February since he's been in the Oval Office.

High-income investors targeted: A lot of attention today is on the president's proposals to tax wealthier Americans.

When it comes to investment income, upon which a lot of higher income earners rely, Obama wants the current 15 percent capital gains tax rate to go back to 20 percent. 

He also wants single filers making $200,000 or more a year and married couples bringing in $250,000 or more annually to pay ordinary income tax rates on their dividends. Right now, qualified dividends receive the lower capital gains tax treatment.

Back to Buffett: And, of course, there's the Buffett Rule. Here the president would have taxpayers who make more than $1 million pay at least a 30 percent tax rate.

This proposal, as everyone knows by now, is named after financier Warren Buffett, who famously complained last year that because most of his income comes from investment earnings taxed at favorable capital gains rates, his secretary pays a higher tax rate on her income than he does on his.

The Buffett Rule was immediately slammed by Republicans as class warfare. We were drowned in statistics showing how much of a tax burden the wealthy carry.

Then the Occupy movement broke out, putting a focus on who earns how much and how much, or little, they pay in taxes on that income. This sense of unfairness is part of what's prompted Obama and his financial (and reelection) advisers to put this issue out front again.

The introduction to the budget says:

Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary's. And, the President is now specifically proposing that in observance of the Buffett rule, those making over $1 million should pay no less than 30 percent of their income in taxes. The Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions. And he is proposing that the Buffett rule should replace the Alternative Minimum Tax, which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended.

Alternate AMT: What caught my eye in the budget document, and which was reiterated in the Office of Management and Budget press conference this afternoon, was that the Buffett Rule would replace the Alternative Minimum Tax (AMT).

This sounds like a great idea.

The AMT was created in 1969 as a parallel tax system to ensure that wealthy taxpayers (defined back then as those making $200,000 -- sound familiar?) didn't use loopholes to escape paying their fair share of taxes (again, sound familiar?).

The problem was that the AMT wasn't indexed for inflation. So over the years, as workers earnings have increased, they've faced the possibility of paying the AMT's 26 percent or 28 percent tax rate instead of their lower personal income tax rates.

Elimination opportunity: Congress has repeatedly approved an AMT fix, sometimes for one tax year, sometimes covering two years, so that middle class taxpayers, who now are the AMT's main victims, don't end up paying this special tax.

And every Congressional session there's talk of eliminating the AMT. But then lawmakers look at the millions that the AMT, even with the annual fix, adds to the U.S. Treasury and they back off.

If Representatives and Senators really want to help out the middle-class filers who have to figure not only their regular taxes, but also the AMT (double tax duty is insult to injury), they should jump on Obama's proposal.

It would get rid of the AMT which no longer does what it was designed to do. In fact, a lot of higher earners would love to pay the AMT's top 28 percent tax rate instead of the 33 percent or 35 percent and possibly, if the Bush tax cuts expire, 36 percent and 39.6 percent tax rates.

The Buffett Rule, on the other hand, with its $1 million earnings threshold would affect, as the AMT originally envisioned, truly wealthier taxpayers.

The bottom line is that since the AMT no longer applies to the high earners for which it was designed, kill it and put one in place that does that job.

Of course, the Buffett Rule and all of the president's other budget proposals aren't going anywhere on Capitol Hill. Even in the best of financial and political times, presidents don't get much of their budget wish lists and this definitely is nowhere near the best of times in Washington, D.C.

But perhaps after Nov. 6 there will finally be a chance that the AMT can be eliminated and the Buffett Rule can be put in its place.

You also might find these items of interest:

• Two expected Obama fiscal 2013 tax proposals already under the political microscope
• The economic and political perils of Congressional gridlock
• Tax and financial fun throughout 2011