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Obama Policies

Obama Policies

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Published by vikash

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Published by: vikash on Aug 27, 2009
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November 5, 2008 
Michael J. Stein
Managing DirectorGlobal Head of Government RelationsMichael.Stein@morganstanley.com
Wes Coulam
Vice PresidentWeston.Coulam@morganstanley.com
Kristin Roesser
Vice PresidentKristin.Roesser@morganstanley.com
 Joshua Wilsusen
Vice PresidentJoshua.Wilsusen@MorganStanley.com
 Analysis o the Policies o President-Elect Obama
Senator Barack Obama’s electoral victory
, complete with expandedmajorities in the House and Senate, gives the Democrats control over the
legislative and administrative processes for the rst time since 1994. Thishas signicant ramications for the new Administration’s policies to deal
with the economic crisis, as well as domestic priorities on taxes, health care,energy, the environment, labor relations, and trade.
oday, President-Elect Barack Obama will shit to presidential transition ollowingmany months o campaigning. He will have just 77 days to assemble a cabinet, setcritical priorities, and prepare a ederal budget (which must be submitted to congressby February). Tough he has not discussed it publicly, these plans are well underway.Te Obama team is actively discussing potential Cabinet selections and will soonbegin vetting resumes or the estimated 7,800 presidential appointee jobs whichmust be lled – 1,177 require Senate conrmation – and nalizing a comprehensiveblueprint which will guide the incoming president through the transition. While it is certain that the Obama presidency will mark a stark contrast rom the Bushyears, what remains to be seen is how much external actors like the economic crisis willimpact his rst 100 days and beyond. Te ollowing examines what we are likely to seeunder an Obama administration on an array o pressing issues.
Tax Policy: Storm on the Horizon
 A undamental component o the ederal budget is the level o revenues or taxes,a nite resource that has implications on individuals, business and the broadereconomy. Historically, tax revenue as a percent o GDP has averaged around 18.1percent. Under current projections by the Congressional Budget Oce, revenues will grow to about 20 percent o GDP by 2012, the end o the next administration,absent additional action. A key issue beore the next administration will be theappropriate level and composition o ederal taxation. An examination o the ideaspresented during the campaign by Senator Obama provides insight into the answer.
(continued on next page)
 Analysis o the Policies o President-Elect Obama
2 |
Tere are two key drivers that will greatly impact the tax debate – theederal budget decit and the expiration o the 2001 and 2003 taxcuts. Federal budget scorekeepers estimate the decit or this year will be about $450 billion and could exceed $750 billion next year,ater actoring in the recent cost o the economic rescue plan recently enacted. In addition, as the economy slows, predictions o uturerevenue collections will be revised downward, putting urther pressureon the decit and the level o revenues to run the government. Against this backdrop is the act that the current structure o thetax code is set to change dramatically as a long list o tax rates andtax credits will automatically expire December 31, 2010, creatinga large built-in tax increase. Beginning in 2011, the ollowingchanges are set to occur:
Te top marginal tax rate or individuals increases rom35% to 39.6%
Te maximum long-term capital gains rate increases rom15% to 20%
Te top tax rate on dividend income increases rom15% to 39.6%
Te estate tax will be repealed in 2010 and then reappear in2011 at pre-2001 high tax rates and low exemption levels
ax credits or children, education, and other incentives willexpire or be reducedGiven these built-in changes, President Obama and Congress will ace signicant tax policy decisions. Underlying the decisionprocess will be two competing philosophical views on the coming2010 changes. Proponents o extending the 2001 and 2003 taxcuts argue that ailure to act will “allow” a $1.5 trillion tax increaseto occur. From a competing perspective, extending the 2001 and2003 tax cuts would “cost” $1.5 trillion in lost revenue to thereasury, highlighting the budgetary challenge o continuing thecurrent tax structure into the uture.Faced with the reality o the current and projected scal pressures,Congress and President Obama are unlikely to agree on extendingall o the expiring tax relie. Tus, the debate will center onprioritizing tax policies and engaging in a give-and-take exercise tond a tax structure that ts within the current scal and economicenvironment. Looking ahead, two overarching pressures will putopposing constraints on the outcomes – (1) the size o the decit will limit the size and duration o any tax extensions or tax cutsand (2) a stagnant or recessionary economy in 2009 and 2010 willmake it dicult to raise taxes too high or too quickly or ear o making the economy worse.
Tax Proposals
 According to the ax Policy Center, Obama’s tax plan would cost$2.9 trillion over 10 years. Hidden within these numbers areproposals to raise taxes on business by either eliminating “corporate welare,” ending “incentives or companies to ship jobs overseas” orusing “tax havens,” and/or raising payroll taxes.Te incoming Obama Administration will need to decide whichproposals to enact and which proposals to put aside as a new budget is crated. One theme that is prevalent in the Obama planis the clear distinction between tax reductions or lower- andmiddle-income Americans and tax increases or individuals making$200,000 or more and couples earning $250,000 or more. Forthese taxpayers, the Bush tax cuts would generally expire and they  would see higher taxes in the orm o additional payroll taxes andthe phase-out o certain deductions.Te ollowing chart outlines the various tax proposals Barack Obama announced during the campaign:
Barak Obama’s Tax Plan
Business Provisions
Corporate Tax RatesNo specic proposal to lower corporate tax rate
Provide a tax credit to employers that increase the number of employees in the United States;
maintain U.S. headquarters; and provide certain benets to employees
Make permanent R&D tax creditHealth Care
Provide a refundable tax credit of up to 50 percent of health insurance premiums paid by a smallemployer for health care for employees
Renewable Energy Production Tax Credits
Make permanent the current tax credit for the production of electricity from renewable sources
Revenue Raisers/Tax IncreasesTax offshore income and “tax haven abuse”
Codify economic substance doctrine
Tax publicly traded partnerships as corporationsTax the “carried interest” income from investment partnerships as ordinary income rather than
capital gain
Tighten rules on tax deductibility of executive compensation
 Analysis o the Policies o President-Elect Obama
| 3
Barak Obama’s Tax Plan (cont’d)
Capital Gains
Raise capital gains rate to 20% (from 15%) for individuals earning $200,000 or more($250,000 for couples)
Eliminate capital gains for certain investments in a small business or start-up business
Raise tax rate on dividend income – from a top rate of 15% to top rate of 20%—for individualsearning $200,000 or more ($250,000 for couples)
Individual Provisions
Marginal Tax RatesMake permanent lower income tax rates (10/15/25/28% rates)Restore top rates of 36% and 39.6% (unclear what income level threshold new rates apply)
Phase out of Personal Exemption and
Itemized DeductionsRestore phase-out of personal exemptions and itemized deductions in 2009 and beyond (taxpayerearning $200,000 (single) or $250,000 (couple))AMTExtend and index AMT exemption at 2008 levels (i.e., maintain current patch)Savers Tax CreditMake the Saver’s Credit refundable and change credit to provide a 50 percent match of the rst$1,000 saved in a retirement planTax Benets for FamiliesMake permanent $1,000 per child tax credit and marriage penalty reliefExpand Earned Income Tax Credit
Expand child and dependent tax creditSeniors/Retirees
Exempt from the rst $50,000 of income received by a senior/retireeMortgage Tax CreditProvide a refundable “universal mortgage credit” equal to 10 percent of mortgage interest paid up toa maximum credit of $800 for taxpayers who do not itemizeWorker Tax CreditProvide a refundable tax credit of 6.2% of the rst $8,100 in wages to offset the current payroll tax
Estate Tax
Rates and Exemption AmountFreeze 2009 estate tax exemption and tax rate levels—$3.5 million exemption and 45% tax rate
Payroll Tax
Subject incomes above $250,000 to payroll taxes. (The new payroll tax would be between 2% and4% and paid by both the employee and the employer like the current Social Security tax. All incomeis already subject to the 1.45% Medicare tax)
Temporary Proposals to AddressEconomic Slowdown
Eliminate the tax on unemployment insurance for 2008 and 2009Allow penalty free withdrawals from retirement accounts (limited to the lesser of 15 percentaccount balance or $10,000)Provide employer tax credit of $3,000 per employee hired in 2009 or 2010 (credit wouldbe refundable)
Observations on the Consequences of Obama’sTax Proposals
 As with most policy decisions, there are winners and losers romchanges to existing tax policy. An examination o the details o thetax proposal can provide some insight into who may benet and who may see tax increases under the dierent tax policy changesoutlined above.
Corporate versus Pass-Trough Entities 
– Te current topcorporate tax rate is 35%. Under the Obama plan, the toptax rate on pass-through income would increase to 39.6%or higher. Although corporate income is taxed twice (again when distributed as capital gain or dividend) the annualtax or pass-through entities could increase above thator corporations.
Domestic over International Businesses 
– Senator Obama hasproposed to “tax corporations that ship jobs overseas.” Detailso the proposal have not been provided, but multinationalcorporations could see a tightening or repeal o the currentrules that allow tax on oreign earnings to be deerred untilrepatriated to the United States. Tis change would only impact U.S. multinational corporations that have earningsrom oreign operations.

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