THE $1.4 TRILLION TAX INCREASE

In his recent address to Congress, President Obama promised that "if your family earns less than $250,000 a year, you will not see your taxes increased a single dime." Yet even before the budget was released, he signed into law a 62-cent tobacco tax increase that does not exempt lower-income smokers. His budget proposes a $646 billion cap-and-trade tax that energy companies would immediately pass on to all consumers, including those earning less than $250,000. Consequently, President Obama's budget would raise everyone's taxes, says Brian M. Riedl, a researcher with the Heritage Foundation.

The budget would offset some of these tax increases by making permanent the Make Work Pay and the American Opportunity Tax Credits, which were originally part of the "temporary" economic stimulus bill. Because tax credits do not reduce marginal tax rates for most taxpayers, they do not encourage the working, saving, and investing that are vital for productivity and growth, says Riedl.

A nearly $1 trillion tax increase is reserved for couples earning over $250,000 and individuals earning over $200,000. Beginning in 2011, the President's budget will increase their taxes by:

* Raising the top two income tax brackets to 36 percent and 39.6 percent ($339 billion).
* Raising capital gains and divi­dends tax rates to 20 percent ($118 billion).
* Phasing out personal exemptions and limiting itemized deductions ($180 billion.
* Reducing the value of their tax deductions by approximately one-fourth ($318 billion).

This $1 trillion tax hike on "the rich" would fall on the backs of only 3.2 million tax filers -- an average tax hike of more than $300,000 per filer over 10 years on a group that is already shouldering an increasing portion of the income tax burden, says Riedl.

Such tax increases would significantly reduce economic growth rates by reducing incentives to work, save and invest. Specifically, higher investment taxes may prevent the economy from receiving the investment capital that it needs to recover. Because most small businesses pay the individual income tax, they would face new barriers to expanding, investing, hiring and even staying in business. Wealthier individuals would be more likely to allocate their wealth wherever it avoids these new taxes, rather than where it would be most productive for the economy, explains Riedl.

Source: Brian M. Riedl, "The Obama Budget: Spending, Taxes, and Doubling the National Debt," Heritage Foundation, Backgrounder No. 2249, March 16, 2009.