On November 4, 2008, the nation elected Barack Obama as its 44th president. Below, we briefly summarize tax policy initiatives that his campaign emphasized on the road to the White House. Of course, the particulars of the tax policy initiatives are not known. In addition, we do not know whether the President-elect will continue to support these initiatives in light of a continuously changing economic landscape.

  1. Increase marginal tax rate on high income earners up to 39.6%. The highest marginal tax rate on high income earners currently stands at 35%. Obama's campaign indicated he would support increasing the marginal rates to levels of the Clinton era rates for high income earners.
  2. Increase long-term capital gains and dividend rate from 15% to 20% for high income earners only . The campaign indicated that Obama would support a tax increase on capital gains and dividends for high income earners. It is not clear whether Obama would seek an increase through legislative action in 2009 or through expiration of the Bush tax cuts in 2010.
  3. Increase FICA tax (colloquially known as the pay roll tax) by 2% to 4% for high income earners effective in 2018. The payroll tax funds Social Security and Medicare. In general, the United States imposes a payroll tax of 6.2% on wages up to the first $102,000 of wages earned per year in addition to United States federal income tax. Obama's campaign has suggested that he would support lifting the cap on the payroll tax for an aggregate increase of between 2% to 4% on high income earners effective in 2018.
  4. Tax carried interest as ordinary income. Currently, private equity funds (e.g., leveraged buyout funds), are generally structured as partnerships. A fund manager generally receives a 2% management fee and a 20% profits interest in the partnership. In general, under current law, the 20% profits interest is not be taxed as compensation at ordinary rates. Instead, it is taxed at 15% in the case of long-term gains. Obama's campaign indicated he would support taxing such income at ordinary rates.
  5. Codify economic substance doctrine. Obama may support codification of the economic substance doctrine. The economic substance doctrine is a common-law doctrine developed by courts in the United States to police tax shelters and operates in some cases to disregard the form of a transaction and tax the transaction instead based on its substance (or disregard all or a portion of a transaction) if the taxpayer can provide no justification for entering into the transaction other than tax avoidance.
  6. Significantly expand refundable tax credits. In pursuit of a goal to reduce taxes for 95% of Americans (to be distinguished from 95% of taxpayers), Obama has indicated his support for significantly expanding refundable tax credits. A refundable tax credit is one in which a taxpayer may still receive a tax credit even if the taxpayer does not owe tax. Obama's campaign suggested that these refundable tax credits would favor middle-class and low-income taxpayers.
  7. Windfall profits tax on oil and gas companies. Obama has indicated his support for taxing windfall profits of oil and gas companies. This initiative is in response to the record profits by oil and gas companies over the last few years and the record oil prices in the first half of 2008. However, as oil prices plummeted from $147 per barrel to under $45 per barrel, it has been reported that Obama may no longer push for such an initiative.
  8. Eliminate income tax for seniors making less than $50,000 per year. Obama's campaign has indicated support for elimination of income taxes for seniors making less than $50,000 per year.
  9. Other initiatives related to credit crisis. As the credit crisis deepened towards the end of his campaign, in late October 2008, Obama indicated he would support the following initiatives: (i) the elimination of the income tax on unemployment insurance for 2008 and 2009; (ii) allowing penalty-free withdrawals of up to 15 percent (but no more than $10,000) from retirement accounts; (iii) providing a refundable $3,000 credit to businesses for each new full-time job they create; (iv) the elimination all capital gains taxes on investments in small and start-up firms; and (v) the lowering of corporate tax rates for companies that expand or start operations in the United States.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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