State of the Union Myth/Fact:<br> Obama's New Taxes on Your 401(k)
MYTH: “To recover the rest [of TARP], I have proposed a fee on the biggest banks. I know Wall Street isn't keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”
FACT: The President himself pointed out that most of the money from the bailout has been recovered from the banks. This new “bank tax” has nothing to do with TARP—it is being assessed on banks which never accepted TARP funds (or have since paid them back with interest), and is not being assessed on TARP recipients who still owe the taxpayers money (like Government Motors). It’s a money grab.
In fact, this new “bank tax” will be passed along by the banks to ordinary Americans. It will be paid in the form of higher 401(k) fees, higher bank fees, higher mortgage and credit card interest rates, and lower interest rates on savings.
MYTH: “We cut taxes for 95 percent of working families…we haven’t raised income taxes by a single dime on a single person. Not a single dime.”
FACT: It’s mathematically impossible to cut taxes for 95 percent of working families. According to the IRS, fully one-third of all tax returns owed no income tax last year. Nearly 20 percent of returns had neither an income nor a payroll tax liability. These people cannot see their taxes cut any further. Anything given to them is pure spending.
Obama, Pelosi, and Reid may not have raised income taxes last year, but they surely tried to. Last year’s administration budget submission had dozens of tax hikes. The health care legislation they are still pushing has 18 separate tax hikes. All told, ATR has calculated that President Obama proposed or supported $2.1 trillion in tax hikes in 2009. And let’s not forget that he signed into law a $65 billion tax hike on cigarette smokers 16 days into his administration. The median income of a smoker is $36,000.
MYTH: “To encourage these and other businesses to stay within our borders, it's time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.”
FACT: Obama is no doubt referring to his tax hikes from last year’s budget. ATR has compiled a series of one-pagers detailing his $210 billion in proposed tax hikes on American companies who have overseas income. How raising taxes on American companies will incent them to remain in the United States is a mystery. The reason these tax breaks are in place is to avoid double taxation of international corporate income. To take away these tax breaks is to tell an American company that they will potentially have to pay taxes twice on the same income. The best solution is to transition the U.S. tax code toward a territorial system (which most of the developed world has done), but getting rid of these tax breaks without doing that reform is foolish. There’s no reason that an American company with an Irish subsidiary cannot become an Irish company with an American subsidiary. America has a 39 percent “all-in” corporate rate. Ireland’s is 12.5 percent.
MYTH: “[We’re] making it easier to save for retirement by giving every worker access to a retirement account and expanding the tax credit for those who start a nest egg.”
FACT: Candidate Obama campaigned on a “forced IRA” plan for small businesses, and President Obama continues to support it. It would force every small business in America which doesn’t have a qualified retirement plan like a 401(k) or a SIMPLE IRA to open a salary-deferral IRA for their employees. Some versions of this plan would also require the employer to start making salary deferrals into this IRA unless the employee opts out. But suppose neither the business owner nor the employee wants to save in the IRA? It would still have to be set up, at the business’ expense. Retirement savings is a good thing, but not at the barrel of a gun. The best solution here is personal Social Security savings accounts for younger workers, who often don’t have the after-tax income to save adequately.
MYTH: “To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can't afford it.”
FACT: Let’s lay out exactly what tax increases he is proposing here (leaving aside the fact that “we” are the ones who can’t afford his taxes, not the other way around):
The top two tax rates (which two-thirds of small business profits face) would rise from 33 and 35 percent today to 36 and 39.6 percent in 2010. The return of the itemized deduction and personal exemption phase-outs would take the mathematical effective top marginal tax rate to 41.6 percent.
The top capital gains rate would rise from 15 to 20 percent. The top dividends rate would skyrocket from 15 to 39.6 percent. This would be a body blow to everyone’s IRA and 401(k) as the stock market priced in this new tax wedge.
Obama-Pelosi-Reid wants to raise the capital gains tax rate for managers of investment partnerships from 15 percent to 39.6 percent. This will leave universities, charities, and pension plans holding the bag as partnership managers understandably demand a greater profit share to make them whole after-tax.
Finally, Obama is referring to repealing the “Section 199” domestic production activities deduction—but only for energy companies. This is a targeted tax hike on one industry. It will result in higher energy costs for all of us (companies don’t pay higher taxes—they pass them along to us as higher prices). It’s shortsighted and counter-productive.