President Obama recently presented his budget for the next fiscal year, which will begin in October. Here is a brief overview of what initiatives are included:
- Will provide national health care
- Will shift our energy use further away from oil and gas
- Will boost the federal commitment to education
The proposed budget will:
The area I would like to discuss is the proposed plan to raise taxes on businesses and upper income households by an estimated $2 trillion. The passing of this tax increase could be potentially harmful for businesses, even nonprofits.
How will this tax work? Nearly $1 trillion would come from tax increases on families with income over $250,000. This is accomplished by allowing current tax cuts that were implemented by former President George W. Bush to expire. The top 2 tax brackets will go from 33% up to 36%, and from 35% up to 39.6%. People that fall within these tax brackets will also see an increase in capital gains taxes from 15 to 20%. And lastly, deductions for mortgage interest and charitable contributions would be limited to the 28% tax bracket, instead of the current 39.6%.
So what does this mean for businesses and why does it matter? First of all, employers need to maintain cash flow. Business owners that are forced to pay higher taxes will have to make cuts in other areas – employees, supplies, etc. It could also mean that current employees would have to do more work for the same wage.
This proposed budget could also hinder the progress of entrepreneurs. If they are going to be taxed at a higher rate, it may not be worth the risk to start or expand a business, and therefore reduce the chance for the creation of jobs.
The government does not realize that increasing capital gains taxes for top earners just motivates them to save only in tax-deferred investment vehicles such as 401(k), defined benefit or profit sharing plans. The government cannot collect taxes on those dollars later down the line, so it could actually result in the government collecting fewer tax dollars than if the lower capital gains rates were left in place.
And what about major donors? Nonprofits will be largely affected when the wealthy cannot receive deductions on contributions to charity. Besides the emotional aspect, what will incentivize them to give?
What we are really questioning here is if these proposed tax cuts will help or hinder us in digging ourselves out of the hole our recession has created. Does taxing the rich really work?
Brent Lindell is a financial advisor with Savant. He has over 15 years of experience as a trust officer and advisor. Brent is responsible for managing all aspects of the financial planning and investment process for clients at Savant’s Madison, Wisconsin office. He routinely meets with clients, advisors, portfolio managers, and planners to determine and coordinate effective planning, investment, and tax strategies.
Brent holds a BA in Economics from the University of Iowa and is a Certified Trust & Financial Advisor (CTFA). Brent received extensive training as a graduate from the Cannon Financial Institute’s Trust School at the University of Notre Dame and is currently pursuing the Certified Financial Planner (CFP®) designation.
Savant is a Registered Investment Advisor. To contact Savant, call 608-831-1300 or log on to www.savantcapital.com.
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