Obama Proposes New Taxes on Dealers, Life Insurance

Amy999

May 11 (Bloomberg) -- President Barack Obama proposed raising money to pay for his health-care overhaul by imposing $58 billion in new taxes on securities dealers, life insurance products and Americans with valuable estates.

The eight new proposals, outlined in budget documents released today, are in addition to more than $1 trillion in tax increases over the next decade the president wants to impose beginning in 2011. Those would include higher rates for top earners and restrictions on tax-avoidance techniques commonly used by U.S.-based multinational corporations.

Frank Keating, president of the Washington-based American Council of Life Insurers, warned against imposing the new taxes. “Seventy-five million American families rely on the products offered by life insurers for their financial and retirement security,” Keating, the former Republican governor of Oklahoma, said in a statement. “This is absolutely the wrong time to make it more expensive for families to obtain the security and peace of mind our products provide.”

Today’s proposals are aimed at making up a projected shortfall in an earlier plan to limit high earners’ deductions for charitable gifts, mortgage interest, investment expenses and other items. That proposal, criticized by Democrats and Republicans in Congress, now is projected to raise $266.7 billion over the next decade, down from an estimate of $318 billion in February.

Obama also would raise $24.2 billion over the decade by adjusting rules for valuing assets in estate planning.

‘Changed Somewhat’

“The composition of the additional revenue measures has now changed somewhat, with the addition of new enforcement measures and loophole closers,” Budget Director Peter Orszag wrote on a White House blog.

Another proposal would raise $1.2 billion over the next decade by stopping hedge fund managers from using equity swaps to avoid withholding taxes on dividends paid to their offshore holding companies.

The tax increases would help offset the cost of Obama’s proposals to permanently rebate part of the 12.4 percent Social Security payroll tax and continue lower tax rates enacted under President George W. Bush for people earning less than $200,000.

‘Ordinary Rates’

The budget would tax income from “day-to-day” dealer activities at “ordinary rates,” ending their ability to pay a lower rate on most of their income. That would raise $4.2 billion along with proposals to change tax accounting rules for sales of corporate stock and for convertible debt.

The special law for options dealers, enacted in 1981 at the behest of then-Chicago Congressman Dan Rostenkowski, lets them pay a blend of capital gains and ordinary tax rates on their income. It works this way: 60 cents of each dollar earned by an options dealer is taxed at the 15 percent capital gains rate while the remaining 40 cents is taxable at ordinary rates as high as 35 percent. Combined, the effective tax rate is 23 percent.

“There is no reason to treat dealers in commodities, commodities derivatives dealers, dealers in securities and dealers in equity options differently than dealers in other types of property,” an explanation of the proposal said. “Dealers earn their income from their day-to-day dealing activities and should be taxed at ordinary rates.”

Life Insurance Changes

The life insurance provisions would modify tax rules when policyholders sell their coverage to investors to receive immediate benefits, and would reduce a deduction that life insurers claim when they manage assets in separate accounts. Another provision would further restrict tax benefits associated with corporate-owned life insurance. Those proposals would raise $12.7 billion through 2019.

The document gives details on proposals to keep corporations and individuals from avoiding about $210 billion in taxes from 2011 through 2019 by shifting income to offshore tax havens.

Obama last week spelled out the biggest changes, including the proposed repeal of three corporate techniques that would otherwise save U.S.-based multinationals $190 billion in U.S. taxes through 2019.

The revenue gained from those proposals would fund a permanent tax credit for research and experimentation expenses, which economists say generally creates jobs.

Treasury officials told reporters today the international provisions were designed to strike a balance between ending tax incentives that promote overseas investment at the expense of domestic expansion. The proposals have received a chilly reception on Capitol Hill including from key Democrats such as Senate Finance Committee Chairman Max Baucus, a Montana Democrat.

Grassley’s Concerns

Iowa Senator Charles Grassley, the top Republican on the finance committee, said he still has concerns.

“If the proposal is, in effect, a job-killing tax increase on domestic businesses for no good reason, then the president will lose my support,” he said.

One new proposal would raise $3 billion by limiting companies’ ability to transfer intangible property such as trademarks and patents to low-tax countries. The budget proposes limiting interest deductions for U.S. companies nominally headquartered in places such as Bermuda. That would raise $1.2 billion over the next decade.

Other proposed corporate changes would end a tax-accounting technique called “last in, first out,” that primarily benefited oil and gas companies when oil topped $100 a barrel and is widely used across industries.

Accurate Measure

The accounting method has been commonly used since the 1930s and is viewed as the most accurate measure of income for financial statement purposes, according to the nonpartisan congressional Joint Committee on Taxation.

Republican senators in April 2006 suggested ending use of the method but backed off after Exxon Mobil Corp. Chairman and Chief Executive Officer Rex Tillerson called the proposal a “backdoor windfall-profits tax.”

In addition to oil companies, the repeal of last in, first out would hit retailers, automakers and makers of non-automotive heavy equipment, textile companies, consumer products firms, drug companies, alcohol and tobacco manufacturers and wholesalers when prices rise, according to tax experts.

For individuals, Obama’s budget assumes Congress will continue to index the alternative minimum tax for inflation. The AMT is a parallel system that can impose higher rates on families earning between $75,000 and $500,000 when their deductions are too high relative to their income.

Executives at private-equity firms, venture-capital firms, some hedge funds and other partnerships that receive “carried interest” in their profits would see their tax burdens nearly triple.

Most of their carried interest is taxed at the 15 percent rate for long-term capital gains. Obama is asking Congress to tax the profit share as ordinary income, arguing that it is a form of wages. Under his plan, most executives would pay 39.6 percent.