The Hidden Taxes In Obama's Budget

Tyler Durden's picture

While headlines yesterday crowed and complained of the small rise in the budget and the focus on taxing the wealthy - which admittedly given the peak polarization in political parties is unlikely to actually move into legislation anytime soon - JPMorgan's Michael Cembalest finds perhaps the most controversial part of the proposal hidden deep in the report. While the JPM CIO notes the CBO baseline and alternative scenarios, it is the difference between the $293bn benefit (CBO estimate from last year) and the Administration's new estimate of $584bn that caught his eye as buried on Page 73 of the Green Book were three new taxes on existing tax-efficient 'benefits'. Tax the mass-affluent (>$250k) seems indeed the new motto of this presidency.


JPMorgan - Eye On The Market:

The President’s Budget: An Unhappy Valentine’s Day card for high income taxpayers


The President’s budget was released yesterday. Due to the political impasse between the parties, it seems unlikely to result in tax legislation this year. But as a reflection of the priorities of the Administration, and as a reflection of its stance in any future budget negotiations, it is an interesting document. The proposal aims to raise revenue from upper income taxpayers by any means necessary. [Note: upper income begins at around $200k in adjusted gross income]. The proposal would, according to Administration projections, stabilize the Federal debt close to today’s elevated levels. Revenue increases play a large role, specifically the following three proposals. The second one surprised us the most.

  • reset tax rates on ordinary income, dividends and capital gains for upper income taxpayers back to 2001 levels
  • for upper income taxpayers, include a portion of municipal bond income, pre-tax employee contributions to defined contributed plans, and pre-tax employee and employer health insurance payments as taxable income
  • limit non-charitable itemized deductions such as state/local taxes and mortgage interest for upper income taxpayers



The following chart outlines some basic budget scenarios. The CBO baseline assumes that 3 tough decisions are taken: Bush tax cuts all sunset back to 2001 levels, the AMT is no longer indexed to inflation, and Medicare reimbursements to doctors are cut. The CBO also provided an Alternative Case, assuming no action is taken at all to reduce deficits. Our Realistic case is an estimate of what would happen if Congress sticks to what it agreed in the Budget Control Act and nothing more. Lastly, the purple diamond is the President’s proposal, as estimated by the Office of Management and Budget.

The President’s budget proposal would get around halfway to closing the yawning gap between CBO Alternative Case and the CBO Baseline. There are elements of the Buffett rule here, but the budget does not contain a minimum tax rate on adjusted gross income on those with AGI over $1 million. Instead, many of the clauses apply specifically to those with AGI over $250k (the numbers shown in parentheses are OMB estimates of revenue raised over ten years).

  • Ordinary income rates back to 2001 levels ($442 bn)
  • Dividends taxed at ordinary income rates ($206 bn)
  • Long term capital gains taxed at 20% ($36 bn)
  • Restoration of limits on itemized deductions and exemptions ($165 bn)

In addition, the proposal raises another $584 bn by, among other things, limiting the tax value of itemized deductions (such as state and local income taxes and mortgage interest) to 28%. While this in theory applies to all taxpayers, in practice it will only affect taxpayers with statutory tax rates above 28%, which means people with AGI over $217k.

The most controversial part of the proposal (at least in our view) was buried on page 73 of the Green Book, which is the Treasury’s “General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals”. We were wondering why the Administration estimated the benefit of the above proposal at $584 bn, when the CBO estimated it at $293 bn just last year.

The answer: this proposal includes a new category of taxable income, which would include your municipal bond income, your contributions to 401k plans and other similar vehicles, and your entire health insurance premium (regardless of who pays it). The approach appears to apply a tax rate to these items equal to the difference between your top statutory tax rate and 28%. For example, a taxpayer subject to a top statutory rate of 35% would pay a 7% tax on this income.

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GeezerGeek's picture

The official price of gold did not change going into the late 1960s. I thought that a salary of $9000/yr would be pretty decent when I graduated from college in 1969. I don't think it was nearly equivalent to $450K using your 50x multiplier, so I guess I reject your simplistic attempt to equate 1954 and 2012. As an aside, I was soon making slightly over $100/month in the USAF. 1968 was not a good year to graduate from college if one was male.

Central Bankster's picture

They were already monetizing by that point, which eventually led to the need to depeg gold from the dollar.  So money truly wasn't worth the quote and that is why they needed to depeg from the gold standard (you know gold?  REAL money)   How much was a movie ticket in 1950s?  $.25- .50; today $8.00 = 16-32 times price inflation.  gas $.27 in 1954 to $3.50 again that is 16:1.  Now here is the real kicker, if it wasn;t for inflation, would the prices of these goods have actually gone DOWN?  One would say yes in terms of real money (gold).  So yes I think it is safe to say this generation lives in relative poverty in terms of income compared to the one you experienced just based on this information.  Sure we have technology, but we live in a depression in terms of relative purchasing power income:goods.  In addition we have run away taxation on our already limited real incomes.

InconvenientCounterParty's picture

The idea of some "fair" level of taxation is a fallacy. The only level that is fair is 0% for all.

Rule of law went out the window sometime between 1850-1900.

Halftime? Half of what? Greed is an exponential function.

traderjoe's picture

If the US Treasury printed debt-free money - like United States Notes, the longest running currency in our nation's history - NO taxes would be needed. Taxes, like the Federal Reserve Note, are a fraud against the people. It's no coincidence that the Income Tax and the Federal Reserve were started in the same year. 

I did it by Occident's picture

maybe they need to make a log-log chart of greed vs. envy vs. govt.  Greed nor envy by itself is not a problem, when paired with laziness, then it gets to be problematic.  Basically the stem of the problem is folks stop earning money and start "protecting wealth."  Basically they want to create barriers to competition (through K-street govt-corporate collusion) to capture cash-flow streams forever.  But real capitalism doesn't work like that.  Even if you are greedy, you would still have to work for it.  And even then you couldn't rest on your laurels for very long, 'cause the competition would come along and take your market share.  Same thing with envy.  Folks not willing to work but supplicating to the government for their "fair share" that wasn't even earned or it was taken from the earners.  The good side of envy paired with hard work is that the upstarts would use that envy as motivation to attain their own piece of the pie.   

But I agree that rule of law is toast for a long time now. 

jm's picture

What's the alternative?  Tax the poor into oblivion?

You have to improvement revenues and there are only so much spending cuts those in office will undertake.  Start cutting off-budget entitlements and a politician dies.  And then there are the interest payments that are set to explode.

Corn1945's picture

Entitlements will be cut in real or nominal terms.

Bernanke isn't stupid. He knows SS, Medicare, and Medicaid won't be cut by the politicians so he will cut them with inflation and false inflation statistics.

jm's picture

Somebody has to deal with the situation so that others can sit back and complain about it.

Corn1945's picture

Not really. 99% of the population has no idea what inflation is or how it affects them.

You can accept a nominal cut or a real cut. Either way you are going to take the hit.

You wanted to believe these fairy tail entitlements would be there for you, now you pay the piper.

Welcome to reality.

And don't give me the "I paid into it!" line of bullshit because we all know now that people receiving 3x more than they pay into Medicare ain't paying enough.

jm's picture

You're preaching the choir, dude.


DaveyJones's picture

if only all the choirs would Chirstmas Carol door to door

GeezerGeek's picture

The ACLU would probably get some court to issue a restraing order.

Rama V's picture

Everybody here at my job knows damn well what inflation does to income.  Your 99% "don't-know" number is based on what - your special societal insight? 

Beam Me Up Scotty's picture

Most fat assed amerikans dont know squat about inflation other than they can't buy as many french fries as they could before.  Might not be 99% but its sure as hell 50%.

jm's picture

It's shocking how stating the obvious collects so many thumbs down.  Some real dummies fililng up the seats here now. 

Gromit's picture

Think of it as a badge of least they're reading your posts!

traderjoe's picture

No, you've missed an obvious solution - default on the odious debt, issue United States Notes (debt-free scrip printed by the Treasury) and completely scrap the Tax Code. Taxes are not required for revenue, except in our private debt-issued currency model. 

It seems you have bought into the banker's paradigm, hook, line, and sinker. 

jm's picture

The United defaulting on its debt posited as a solution.  What a pathetic reflection on how much we've deluded ourselves and how low we've let ourselves descend. 

Paying your bills isn't a banker's pardigm.  It is simply reasonable, rational thinking to pay what you owe.  Far superior to to the deadbeat nation you endorse.


Beam Me Up Scotty's picture

Heres the deal.  I've always payed my bills.  On time every time.  Student loans, payed.  Car loans, payed.  Credit card paid in full every month.  If I can't pay it when the bill comes, then I dont buy whatever it is I think I want.  I wait until I've saved for it.  Mortgage payment payed every month even though my house is worth half.  I've even paid extra principle to keep close to the surface of the water.  I didnt choose strategic default and sure as hell could have.

But you and your big government/more goverment people have created a debt/taxpayer load that is unsustainable even for me.  At the end of the day, the government isn't going to want what I have paid in taxes over the years, it is going to want what I have saved over the years as well.  Eventually it will want everything, yours, mine, everyones.

The solution is smaller government.  Period.  The so called poor in this country who have 2 cars, and A/C and top of the line Directv can do with less, and start making some smarter decisions.  I see people who live paycheck to paycheck and they talk about watching HBO last night.  They drive a nicer car than I do, and I can afford to own a new one but choose not to because its a bad financial decision. 

The social safety net is nothing more than a hammock.

jm's picture

I pay my bills too.  So does pretty much everybody else in the United States.  Many of the miscreants that post here are the deluded fringe. 

But you and I are the indirect beneficiary of decades of government debt largesse.  You have relatives that take Medicare reimbursements ir SSI-- thus you don't have to chip in as much on their bills or their living expenses.  Your contribution is as much as every other taxpayer.  These are is just two of a huge number of examples of everyone indirectly benefitting from decades of debt accumulation.  Hopefully you are not too stupid or deluded to realize this.

But guess what.  Bond yields rise a couple of hundred basis points and the number one expense you will have to pay for is interest on the debt. It doesn't matter if the government starts spending only in line with revenue.  The bill will be due anyway. 

It doesn't matter if it is your fair share or if it is right or if it is unicorn piss running down your head.  You will pay for this one way or another.  Or you can leave.

Now sure, it is not fair that the (more) responsible have to pay for the (relatively) irresponsible.  But it doesn't matter.  More people need to get their heads out of their butts for a moment and look at how the world really works instead of complaining about how unfair it is when the government raises taxes.  Surely you have sufficient IQ to realize this.

Everybody went along with the game.  Now you will pay up according to your ability to do so.  Or you leave.

Beam Me Up Scotty's picture

But you and I are the indirect beneficiary of decades of government debt largesse.

Yes, you and I and every other fat ass who is on the dole.  The difference is, I am not on the dole and they are.  They sqandered their largesse, and want me to pay for it.  I didnt squander mine.

Its just like the 3 Little Pigs.  The two who built their houses out of straw and sticks so they could have a nice new car and Platinum package TV and an Iphone they can't afford suddenly want to live in my house.  No, make that they want to take my house and kick me out of it.

jm's picture

I'm not disagreeing with the basis and legit nature of your rant.  My point is that ranting is irrelevant to the situation, and not even useful to engage in anyway.  I accept that much of my effin' money is going down the tubes to some bum.  It is the price I pay for living here. 

It doesn't matter if all welfare went away tomorrow.  You have interest to pay on past debt that will not go away.  When bonds yeilds rise... it may be decades from now, but when they do... it will no country for old men, if you pardon my allusion.

PrinceDraxx's picture

Only reason you are "paying the price to live here" is because someone else isn't. The government is well-provided for by the constitution. Taking money away from people who earn it is nothing but robbery. If you think it isn't robbery, don't pay the IRS and watch them come and get every thing you have worked for and if you object, they will either put you in jail or shoot yur dumb ass. They rob the law-abiding citizens and give the money to (for the most part) to people who are too lazy to lift a finger or get off their asses and earn a living. Just my 2 cents worth. I yield the stump.



traderjoe's picture

There never should have been a debt/bill in the first place. Please do some reading on the Federal Reserve, its creation, debt-money vs. sovereign currency, etc. 

Your argument that everyone has benefited from debt-largesse and therefore everyone should pay up (or leave) doesn't hold water. You are caught in a paradigm - one of debt-slavery taught to you by the money masters. That's your choice, but please don't implicate it onto me. 

jm's picture

+1 for psychobabble.  Pay what you owe and everything takes care of itself.

dzai jen

BliptoP3's picture

No elected government official tax?

Count de Money's picture

So Obama wants to kill off the muni bond market? The states will love that one. And what will happen before cap gain rates rise? A market crash. Just what Dr. Barack ordered.

The mistake here is believing that this budget is actually serious. It's not. It's a campaign slogan.

sdmjake's picture

You're right Count...and we're the piss boy.

GeezerGeek's picture

And all those big, tall guys in the NBA would be really upset too.

xela2200's picture

There is a big disconnect between the Federal Government and the States. The Federal Government is just running amok. A few states are already reveling. Utah even wants to start issuing its own money. Other states don't want to enforce stupid pot laws.

I do have to say that some states and municipalities have been practicing austerity while the Federal Government goes on borrowing and printing.

barliman's picture


How amusing!!!

Is there anyone dumb enough to believe that thesee new taxes would only apply to those earning more than $ 250k/year?

This is for anyone who pays taxes - if you pay taxes you will also be taxed on your 401(k) [pre-seizure] contributions and your medical insurance.

Otherwise there won't be near enough REVENUE for the 50% that don't pay taxes.


goodrich4bk's picture

Which 50% don't pay taxes?  Give me a citation (hint: you won't be able to find one)

I didn't pay federal income tax last year because my business was slow.  I still paid the following taxes:

$8,370 self-employment payroll taxes

$11,500 property taxes

$1,600 state franchise taxes

$420 state sales taxes

$810 gasoline taxes

$70 telecom taxes

$220 capital gains taxes


So, again, give me a citation for your obvious lie that 50% of Americans don't pay taxes.

Corn1945's picture

The statistic is: almost 50% of the population pays no Federal Income taxes or receives a refund (i.e. takes money from someone else).

That is verified true. There is no way to worm around it.

Those people need to start paying their "fair share" because 0% isn't fair.

We can't have a functioning political system with so many being a net beneficiary of government theft.

crawldaddy's picture

again, there are plenty of other taxes paid by these people other than federal.


You want to talk about fair.  You want to know whats not fair, 400 americans makes as much as 160 MILLION combined.


These 400 make their cash due to their coziness  and giveaways from various governments.

Corn1945's picture

Obama isn't talking about raising taxes on only those 400.

He is going to raise taxes on the 250k+ crowd which isn't even a lot in parts of the country.

We'll talk when the target group is the thieves on Wall Street. Until then, you can go fuck yourself and your taxes hikes.

Havana White's picture

"$250K isn't even a lot..."  Yeah, okay, Mitt.

Real Estate Geek's picture

Maybe $250K is a king's ransom in Hicksville, or whatever podunk town you live in, but it doesn't go far at all in NYC or SF.

DaddabhaJataka's picture

If $250k is too much for you to pay taxes on where you live, then move somewhere else, foul mouthed cur.

Real Estate Geek's picture

The rest of us pay those taxes too, which takes us right back to his point.  Half pay no federal taxes, and they're the biggest of all the taxes you listed.

And WTF do the top 400 have to do with the fact that 50% pay no fed taxes?

barliman's picture



How should those who get a refund from paying no taxes be counted?

Mathematically and financially, leaving them out skews the percentages to look lower than the 50% number.


FeralSerf's picture

You can't squeeze blood out of a turnip.

tarsubil's picture

0% income tax rates are the beginning of fair.

The act of providing all your financial information to a central state is unfair regardless of rate. It is something a slave would do.

My fair share is what I would volunteer. I would volunteer nothing if I were free.

Tortuga's picture

What about the EIC, it's not a refund but a grant. There is a new category (or it's one i haven't noticed before); for us low income folks with no deductible children; of $484.00, based on incomes (much higher than I thought practical) such that us two retired empty nesters qualify. Amazing.No, we entered 0 on that credit line. We have as much integrity as the fellow that found that herd of gold coins in the vacant house and reported it, we don't take what doesn't belong to us. GBA and RICO all banksters and their hore politicians; impeach the entire current DOJ and 7k lawyers at the bottom of the ocean is a good start. Go Hilary, you were born for the World bank job.

snblitz's picture

Just look up the Earned Income Tax Credit at the IRS site.  In addition to paying little or no Federal Income Tax, the EITC offsets the "burdens" of other taxes such as SS.

So on the one hand people point and say but see they pay SS, but with a hand behind their back the government quietly refunds them this same money and more.

barliman's picture


Hmmmm ...

No ... but feel free to post all the citations you like disproving my statement


Beam Me Up Scotty's picture

Lets hear about all your deductions too.  You are counting the self-employment payroll taxes as taxes?  You had income, of course you are going to pay those.   You'll be the first one in line with your hand out to get your SSI back.  You are paying twice as much in as everyone else and you won't get any of it back, unless you are about to retire soon.  I wouldn't be arguing for a tax increase on the wealthy if thats what you are doing.  All higher taxes are going to do is create an even BIGGER government.  Not one cent of it will go toward any sort of fiscal sanity.

barliman's picture


Ahhhh, the red flaggers ....

Whether you take exception to line 2 - "... only apply to those earning more than $ 250k/year?"

or line 3 - " ... if you pay taxes you will also be taxed on your 401(k) [pre-seizure] contributions and your medical insurance."

or the truly INFLAMMATORY line 4 - " ... there won't be near enough REVENUE for the 50% that don't pay taxes."

Toddle off and do some research (Wikipedia and Huffington Post articles do not count as research) on previous "soak the rich" tax efforts (I'll give you a freebie - the Alternative Minimum Tax or AMT) have ended up 'accidentally' having far wider effect than 'originally intended' ['items' are droll sardonicisms used to describe what was planned all along].

With respect to the 50% calcultion - add into the count all those people whose income directly or indirectly comes from taxes. This is far more than the total number of federal, state and city employees - it includes anyone whose paycheck is indirectly subsidized by working full time on any federal, state or city 'project'/grant.

Decades ago, I counted myself among them - I worked for years on DOE projects. No one understood when I wouldn't join in on bitching about taxes; my answer "Every dime of my salary is coming from the DOE. If I didn't have these projects to work on, I would probably be unemployed, looking for work and not paying any taxes."


OutLookingIn's picture

And just how did this JPM mogul find this little gem buryed within Obammy's new tax plan?

Because it was most probably written by JPM and sent to Obammy for ratification and his required signature.

Nothing happens between Wall street and Washington by accident.