Under current law, people in the two highest income tax brackets get to take an amount equivalent to 35 percent of their tax-deductible payment off their federal tax bill. Those in lower tax brackets get smaller deductions.
Obama is proposing to limit the deduction rate for those in the two highest tax brackets to 28 percent. Obama is also calling for slight reductions, or phase-outs, for the total amount of itemized deductions and personal tax exemptions for married couples making more than $250,000 and single Americans making more than $170,000.
The Obama administration said last year the revenue would have helped pay for the healthcare overhaul. This year’s budget uses the money to reduce the deficit, expected to remain above $1 trillion through 2011 and average $850 billion over the next decade.
Obama administration officials have defended the plan, noting the lower deduction rate had been in place during the Reagan administration.
Despite persistent opposition in Congress, White House Budget Director Peter Orszag held out hope that the proposal would be passed.
“We’re going to fight for the things that we put forward because we believe we need additional job creation now and significant deficit reduction in the out years, and I think that that reflects the priorities that not only the president has put forward but that make most sense for the economy as a whole,” he said during a news conference earlier this month.
Charitable organizations, along with real estate agents who benefit from tax-deductible home sales, have criticized Obama’s proposals, arguing they would suffer if they became law.
Charities could see a drop of about 3 percent in the donations they received and a decrease of about 10 percent in donations from upper-income Americans, according to Bob Williams, a senior fellow at the nonpartisan Tax Policy Center.
“The philanthropic sector was very worried because they themselves were hurting in the current environment, with the reduced value of all the investments,” Williams said.
But there’s also a case to limit the deduction rates, as they amount to a subsidy for the rich, Williams said.
Obama’s plan “would make it a more level playing field,” he said.