« »

Tuesday, February 8, 2011

Finance professionals assess the tax implications of Obamanomics

Lowering taxes is considered a form of economic stimulus
Obamanomics is believed to have a "trickle up effect"
Tax implications of Obamanomics and the 'trickle up economics' the President supports are directed at several key economic concerns.

Primarily, the effect on the federal budget deficit is relevant. Also, the effect of tax code changes on reducing the tax burden on middle class families, economic growth  environmental sustainability,  health care and education reform and  simplification of tax code requirements are also of concern.

These goals require legislative acts that have significant affect on taxation of individuals, families, and businesses.

Legislative changes to taxes

A recent legislative act of congress signed into law by President Obama is the 'American Recovery and Reinvestment Act of 2009'. This act has several tax provisions consistent with 'Obamanomics', and President Obama's 2008 tax plan campaign. Among the provisions within the Act are the following:

• Tax credit for production of renewable energy
• Continuation of first time home-buyer tax credit to 12.01.09
• Unemployment income deduction up to $2400.00
• Income and cost limited new vehicle sales tax deduction
• Introduction of an income tax credit
• Child tax credit increase for 2009 and 2010
• Tax credits for businesses

Of the changes in the American Recovery and Reinvestment Act of 2009 , several are only temporary. This is so they can provide short-term relief to various parties until the economy improves. It also assists Government itself through numerous Federal monetary allocations; for example Title VIII of the act addresses health and education related programs. More specifically, the Act addresses environmental reform, lower tax burden for unemployed, low income and other taxpayers. by providing financial assistance and tax relief, however it does not fulfill the Presidents aims of budget deficit reduction.

Changes to taxes can also affect the federal budget which is financed by taxes. When taxes can't pay for the budget, the government accumulates a deficit. Depending on whether this deficit is measured as a percent of gross domestic product or in actual dollars it can seem like different sizes.

Benefits of tax relief include greater wealth distribution
Tax relief lowers government revenue
In the first phase of Obamanomics, tax relief will negatively affect the federal budget, after which, increases to some taxes are forecasted to be implemented when the economy is less likely to suffer from those changes. Moreover, a greater amount of tax revenue can be collected from a strong economy than a weak economy hence the higher initial cost of economic stimulus for taxpayers in general. This will likely require some sound financial decision making by the Federal Government.

Economic effectiveness of Obamanomics' tax adjustments

According to a March, 2009 Wall Street Journal article entitled 'In Defense of Obamanomics', Laura D'Andrea Tyson illustrates the Obama economic vision could reduce the national budget deficit by hundreds of billions of dollars, and is not really worse than it has been in previous administrations in terms of top tier income tax and deduction percentages.

Tyson states the goals of Obamanomics are dependent on the U.S. economy reaching specific benchmarks. After the U.S. economy reaches projected growth points, adjustments to taxation will yield the financing necessary to reduce the budget and help carry out Obamanomic objectives. These objectives necessitate adjustments to taxes yielding tax implications that affect several strata of the U.S. economy, some of which are listed below:

• Refundable tax credit financed from Federally issued carbon emission permits
• Higher tax on top 3% of wealth recipients
• Lower tax on middle class
• Higher Capital gains and dividend tax for upper class
• Limitations on tax deductibility of dependents
• Expanded annual tuition tax credit

The economic goals and means by which those goals are to be carried out, are evident in President Obama's aforementioned 2008 tax plan. In order for these objectives to be achieved, Congress would need to pass additional legislation that approves executive budget proposals, and implements changes to U.S. taxes and Government programs. A few of the changes projected by Obamanomics are as follows:

• Reduce deficit as percentage of GDP
• Sustain federal programs such as Medicaid and Medicare
• Lower carbon emissions
• Increase energy efficiency
• Finance tax refunds
• Job creation
• Small business assistance

Tax implications of Obamanomics are wealth shifting in effect. While the full extent of Obamanomics has yet to be carried out through multiple legislative Acts, the intent and goals of the economic vision are quite clear. By stimulating the economy, the administration hopes to lead the country into a more prosperous state through economic adjustments aimed at both working and middle class benefits, environmental sustainability and small business assistance.

According to Lori Montgomery, a Washington Post reporter, the White House has confirmed the national budget is projected to continue deficit spending into the trillions of dollars for the next few years. This forecasted national budget will possibly either lead to budget cuts and/or increased taxes. Individuals, families and large businesses that comprise the higher tiers of American wealth are more likely to see tax increases following the expiration of tax cuts from previous years.

Image license: Ken Teegardin, CC BY-SA 2.0; Chris Tolworthy, CC BY 2.0