President Obama's tax proposals are weak on details

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President Obama in the oval officeOn the day before President Obama delivers his State of the Union address, there is some good news to be had: The Dow is up. The NASDAQ is up. The S&P is up. Even the dollar is up.

But those indicators mask a much grimmer reality: Unemployment remains high. The housing market is down. And consumer spending remains flat.

The president will likely tout the good and the bad in his annual State of the Union address on Wednesday. Assuming there are no surprises (a pretty good assumption), Obama will highlight recovery efforts while still looking to push through incentives to create jobs. Here's what to expect on the tax front:

  • A new tax credit for small businesses that hire new employees. This idea didn't pass muster last year, but a 10% unemployment rate in an election year may push Congress to act.
  • A tax on banks to recover approximately $41.4 million in TARP money that was given to companies like Chrysler, AIG, and GM, which is not expected to be repaid.
  • Double the child tax credit for families earning less than $85,000 per year and increase the amounts available for families earning up to $115,000 per year.
  • Expand the saver's tax credit to more taxpayers (the current cap for married taxpayers is $55,000) and make it refundable; the trade off is that the corresponding credit would be smaller ($500 maximum).
  • Establish automatic IRAs for employees whose employers who do not offer a retirement plan.
Specific details on the president's proposals are sketchy. It is not certain how any of the tax plans would be implemented, and there's no guarantee that Congress will push any of them through. But in an election year, pitching them as relief for the middle class is likely to win points with voters.

The President is keenly aware that expanding tax credits without cuts in spending isn't realistic. As such, he has also proposed a three-year freeze in spending. Likely targets of those cuts would be less popular departments of government, such as Housing and Urban Development (HUD), the Department of Justice (DOJ), and the Department of Transportation (DOT). You can count on the bigger departments such as the military and the Department of Homeland Security to escape largely untouched.

The bottom line is to not expect a lot of surprises in the budget when it comes to taxes. There's little room in the budget to expand tax credits or introduce new cuts. However, the President has to acknowledge that the middle class is continuing to suffer through the effects of the recession. After the address, there will likely be a lot of noise about tax cuts and tax breaks on both sides of the aisle in Congress -- but don't expect anything more dramatic to come of it than these few tax tweaks.
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