OMB Director Restates Administration's Plans to Limit Itemized Deductions for Wealthy Taxpayers

OMB Director Restates Administration's Plans to Limit Itemized Deductions for Wealthy Taxpayers

News story posted in Executive on 12 May 2009| 11 comments
audience: National Publication | last updated: 18 May 2011
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Summary

Office of Management and Budget Director Peter R. Orszag in a May 9 OMB blog has reiterated the Obama Administration's plans to cap the rate at which taxpayers earning over $250,000 can use itemized deductions to reduce their income tax liability at 28 percent.

Full Text:

Saturday, May 9th, 2009 at 9:30 am

The Health Care Reserve Fund: A Historic Commitment to Reform

Peter R. Orszag, Director

As I have said more than a few times before (even on this blog) reducing health care costs is the key to the country’s fiscal future and also to providing relief to American families from rising health care bills. To that end, the Administration is committed to reforming health care this year and to doing so in a deficit-neutral manner. 

We began that process in February in the budget overview, which included a $634 billion health care reserve fund -- a substantial down payment toward health care reform. On Monday, when we release the Summary Tables and Analytical Perspectives of the Budget, you will see that the full Budget does exactly the same thing and includes $635 billion in a health care reserve fund.

As in the February overview, about half of the health care reserve fund in the full Budget comes from savings in Medicare and Medicaid that would improve the health care system’s efficiency and quality.  There is a change (the "$635 billion" in the above paragraph is not a typo).  In the time since we released the February overview, the health care reforms in the reserve fund have been re-estimated to save about $7 billion less over the next 10 years, while the limitation on itemized deductions has been re-estimated to save about $51 billion less over this period.  We closed this gap by dedicating some other tax enforcement measures and loophole closers totaling $60 billion. This then brings the reserve fund in the full Budget to almost exactly the same total as before.

How do we do it?

First, we improve tax compliance and eliminate unjustified tax breaks for narrow interest groups. For instance, the Budget proposes to:
  • Expand information reporting that will help the IRS catch tax cheats. The expanded information reporting is expected to raise more than $10 billion over the next 10 years, by allowing the IRS to better enforce existing tax law. 
  • Target valuation games played by those facing estate and gift taxes that allow them to undervalue transferred property, raising another $24 billion over the next 10 years.
  • Immediately clamp down on a tax loophole that is giving an unintended, multibillion dollar windfall to paper companies, saving more than $1 billion this year and next. 

Second, as in the February overview, the Budget would also limit the tax rate at which families making more than $250,000 can take itemized deductions to a maximum of 28 percent. This is a matter of fairness. If you’re a teacher making $50,000 a year and decide to donate $1,000 to the Red Cross or United Way, you enjoy a tax break of $150.  If you are Warren Buffet or Bill Gates and make that same donation, you currently get a $350 deduction—more than twice the break as the teacher. Limiting itemized deductions for high-income Americans would help restore balance to the tax code, and any effect on charitable giving is likely to be swamped by other Administration policies. The best way to boost charitable giving is to jumpstart the economy and raise incomes—and the purpose of the Recovery Act enacted in the Administration’s first month in office was to do precisely that. The limitation on itemized deductions is now expected to raise about $267 billion over the next 10 years, which we will devote entirely to health care reform.  All together, these policies would raise a total of $635 billion to be devoted to health care reform—almost exactly the same total amount as in the February overview.

It is true—more savings than this will be needed to pay for comprehensive health care reform in its entirety. But I believe that the reserve fund, in itself, represents a historic commitment, and I look forward to working with Congress to bring about—and pay for—fundamental health care reform this year.

Source: http://www.whitehouse.gov/omb/blog/09/05/09/TheHealthCareReserveFundAHistoricCommitmenttoReform/

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Comments

Precursor to a renewed attack on FLPs?

"Target valuation games played by those facing estate and gift taxes that allow them to undervalue transferred property, raising another $24 billion over the next 10 years." It looks as though there is going to be a renewed attack by the service on FLPs and the valuation discounts being taken. The idea that Orszag is calling valuation discounts "games" is another indication that this administration is bound and determined to vilify legitimate planning techniques to further their goal of imposing a greater and greater burden on those families that have, in fact, EARNED the wealth that they wish to pass to their INTENDED beneficiaries.

Cap on charitable deductions

This proposal is just an extension of Obama's basic belief that it is not "fair" that some people make a lot of money and some do not, and his desire to level the playing field by "redistribution" of wealth. ("From each according to his ability; to each according to his need....Karl Marx!) The proposal also echos the belief that liberal elites have always held that they are much better equipped to decide what is best for us indolent rednecks out here in the hinterlands than we are, so why not just turn over the lion's share of our earnings and let them spend it in our behalf? They believe that more and bigger government is the answer to every problem society faces, and discouraging the growth of non-profit organizations that could be seen as competitors in the social programs arena is consistent with that view.

Fairness

why do these folks at OMB have the right to determine what is fair. It does seem like the Director is simply trying to justify a tax hike on those that make over $250,000. Why not simply say, "we are raising the taxes of those who make over $250,000" and cut out this "fairness" talk.

Assume for a moment that the

Assume for a moment that the top income tax bracket is 35% and that we cap charitable donation deductions at 28%. If you give $100 to charity when in the 28% bracket, you are out your $100 and pay no tax--the charity gets $100 and your net cost of being charitable is $100 If you give $100 to charity when in the 35% bracket, you are out your $100 but also have to send $7 to the IRS ($35 tax on 100 less the $28 deduction)--the charity gets $100 but your net cost of being charitable is $107 Why do people think this will not dampen donations???????

Fairness in income

So then, I suppose Orszag's next steps will be: 1) to propose a salary cap of $250,000 on all Americans and then 2) propose a confiscatory tax on the excess. Oh wait, he's already taken care of No.1! Fairness, indeed....

Fairness is in the Eye of the Beholder

Orszag is stretching the definition of fairness here to suit his purposes. Leaving aside the fact that Bill Gates and Warren Buffett are mostly subject to capital gains tax as opposed to income tax on wages, the fact that Orszag would compare two charitable contributions of equal size made by two individuals on opposite ends of the marginal tax rate table is absurd!

OF COURSE those in the highest brackets are going to get a larger deduction for a contribution than someone in a lower bracket - that's because they pay more in taxes! They are in a higher tax bracket! To call that unfair is either ignorance (which I doubt, because Orszag is a smart guy) or a twisting of facts. It's apples to oranges to compare those two donations.

Did he say loophole in the same line as estate tax?

The previous comment is right on point. When BillGates puts $30 billion in his private foundation, he will pay no estate tax on it--possibly a whopping $15 BILLION in taxes--and he can decide where to spend his $30 bllion. When the rest of us pay taxes, we have to let jerks like this guy decide how it wlll be spent. Yes, Gates and Buffet are generous but obviously they don't trust the govt to use their money wisely. In today's world they'd be more generous to give it to the treasury to help us pay for the national debt!

It's their money

A person who puts their own money into a private foundation is deciding which causes he or she wants to support. The money is not spent on their personal lifestyle, but the charitable causes they support. What's wrong with doing with your own money what you want to do? The cost of government to provide anything is more wasteful in overhead then any private sector. I suggest that all the true believers of tax tax tax, just do the short form, don't even take the standardized deduction and send in your check to support the unnecesary spending of all the pork that this president and congretional leaders promised would not be in any legislation. Charities providing service to the less fortunate have been around before the government got so involved in our lives and will continue as best they can through this new "fairness policy".

Wrong about the Rates

Actually Warren Buffet and Bill Gates probably take their charitable deductions at the 15 % cap gain rate since that is the form of most of their income. Warren Buffet's salary is $100,000. A recent study found that the top 400 taxpayers in the U.S. pay at an effective rate of 17.2% because so much of their income is capital gain. So Bill and Warren and most of the rest of the super rich will not be affected by this proposal--doctors, lawyers, CPAs and upper middle income business owners will get hit by this. Folks who make a lot-- $200,000 to $1 million a year, but its all wage income. Even if the capital gain rate goes up to 20% as Obama has proposed, Bill and Warren are still safe from this proposal. This is an overall issue with most of Obama's tax proposals--they hit the bottom of the top 5% the hardest, leaving the very wealthiest taxpayers still at a 20% tax rate if and when they decide to realize a capital gain. Maybe the other 95% don't care, but it is a strange notion of fairness.

FAIRNESS INDEED

Douglas' comments above are right on point: How stupid does Orszag think Americans are? Fairness would be if everyone paid some taxes, and above a certain minimum, everyone pays the same rate of taxes.

FAIRNESS!!!

Orszag has to be kidding...or he is the dumbest administration official in history. To say that there is some sort of FAIRNESS problem when a teacher who donates $1,000 gets a tax break of $150 and Buffett gets a tax break of $350 either is kidding or is really dumb! I hesitate to point out the fact that the teacher only PAYS $150 in tax on the $1,000 in income (therefore, only gets a $150 tax "break")...whereas Buffett PAYS $350 in tax on the same $1,000. The reason I hesitate is because I would assume someone in our administration (Orszag) would already know this fact. Thereby, fairness is perfect already in this situation. Which brings me to the original conclusion...he must be the dumbest person in this administration!

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