Tax plans differ on who will see cuts, how much
Posted on Sunday, October 5, 2008
Death and taxes may be the only things in life that are certain, as Benjamin Franklin observed, but promises to cut those taxes have become just as sure on the modern American campaign trail.
And this year is no exception.
Various analyses of the tax plans put forth by the leading presidential candidates show that Republican Sen. John McCain and Democratic Sen. Barack Obama each would reduce taxes for most Americans. The difference lies in whose taxes would be cut and by how much.
Those assessments also agree on another key point — that either plan, if enacted as proposed, would add trillions to the federal deficit. Either “would substantially increase the national debt over the next 10 years,” according to a recently updated analysis by the nonpartisan Tax Policy Center.
Compared with current law, the center “estimates the Obama plan would cut taxes by $ 2. 9 trillion from 2009-18. McCain would reduce taxes by nearly $ 4. 2 trillion. Obama would give larger tax cuts to low- and moderate-income households and pay some of the cost by raising taxes on high-income taxpayers. In contrast, McCain would cut taxes across the board and give the biggest cuts to the highestincome households.” Those well-off households — those with incomes above $ 603, 403, about one of every 100 households — now pay more than 25 percent of income taxes.
What makes the quadrennial tax debate different this year is the financial crisis that has consumed Wall Street and Capitol Hill. Tax-cut proposals that were optimistic at best may now be unrealistic in the current fiscal climate.
“They are both in la-la land and have been all along,” said Len Burman, director of the Tax Policy Center. “The current financial crunch makes that clearer.” Even the candidates acknowledge the reality that fiscal circumstances may require them to temper their campaign proposals.
“Does that mean that I can do everything that I’ve called for in this campaign right away ? Probably not,” Obama said in an interview on NBC’s Today. “I think we’re going to have to phase it in. And a lot of it’s going to depend on what our tax revenues look like.” McCain recently told reporters at a campaign stop in Michigan that “the way out of this is to grow our economy, cut spending, keep taxes low.” His chief economic adviser, Douglas Holtz-Eakin, added that “the recent budget news has made clear that the challenge is greater, and the importance magnified. But it does not undermine the soundness of the overall strategy.” DIFFERING PHILOSOPHIES McCain and Obama have outlined fairly detailed tax-policy proposals on their campaign Web sites. And both discuss the issue on the stump — although they have sometimes included provisions in their speeches that are not in their formal plans. “Both offer significant tax cuts,” said Burman, who heads the Tax Policy Center, a joint venture of the Brookings Institution and the Urban League, two Washington research and advocacy groups. It has compiled a detailed comparison of the two plans, which is available at its Web site at www. taxpolicycenter. org.
In terms of their approach to the 2001 and 2003 tax cuts — which are set to expire in 2010, thereby increasing taxes in 2011 unless Congress takes action otherwise — they take a similar approach toward the middle- and lower-income tax brackets.
“For all the bombast between the two campaigns, they agree on most of it,” Burman said.
Where they diverge is in the approach to those in the top two income-tax brackets — which primarily affect taxpayers earning more than $ 250, 000. That distinction illustrates the differing philosophies behind their tax proposals.
McCain and Obama “see the role of taxes in vastly different terms,” said Jeffrey Gramlich, an accounting and tax professor at the University of Southern Maine, who has compiled his own comparison of the two plans.
“Generally speaking, Sen. McCain aims to minimize the impact of taxes on the economy, thereby spurring greater economic efficiency,” Gramlich writes. “On the other hand, Sen. Obama would use taxes to achieve economic and social goals such as making education, homeownership and child care more affordable, encouraging poor and senior citizens to work, and redistributing wealth from the affluent to the poor and middle-income segments.
SPECIFIC PROVISIONS INDIVIDUAL TAX RATES. Both candidates would maintain the 2001 and 2003 tax cuts for middle- and lower-income taxpayers. McCain would permanently extend virtually all of those tax cuts, keeping the top individual tax rate at 35 percent. Obama would maintain the current 10 percent, 15 percent, 25 percent and 28 percent tax rates. He would repeal the 2001 and 2003 cuts for the top two income-tax rates — generally those earning more than $ 200, 000 for an individual or $ 250, 000 for a couple — reinstating them to their previous levels of 39. 6 percent and 36 percent.
In addition, Obama proposes several new provisions: Eliminating all income taxes for individuals or couples 65 or older who earn less than $ 50, 000.
Providing a refundable 6. 2 percent tax credit to offset payroll taxes. Reinstating the personal-exemption phaseout and itemizeddeduction limitation — which would effectively raise the top tax bracket to 40. 79 percent, according to an analysis by the Tax Policy Group of Deloitte Tax LLP. Expanding the Earned Income Tax credit to cover more families and increasing the amount they can receive. Providing new or expanded tax credits in areas affecting retirement savings, child care, college expenses and mortgage payments.
McCain, meanwhile, proposes raising the personal exemption for dependents, phasing in the increase by $ 500 per year starting in 2010 until it reaches $ 7, 000 in 2016. ESTATE TAX. Both candidates would increase the estate-tax exemption and reduce the estate tax compared with current law. That would eliminate the tax for more than 99 percent of estates.
McCain proposes a 15 percent tax on the approximately 0. 2 percent of estates valued at more than $ 5 million for individuals or $ 10 million for couples.
Obama proposes rates ranging from 18 percent to 45 percent on the approximately 0. 3 percent of estates valued at more than $ 3. 5 million for individuals or $ 7 million for couples. duced. Under Obama, another 4 percent would see a fractional rise in their taxes.
McCain would cut taxes in every income-tax bracket, according to the Tax Policy Center analysis, with the cuts growing from 0. 2 percent for the lowest 20 percent of taxpayers to 3. 7 percent or higher for the top 1 percent.
Obama would cut taxes for 95 percent of taxpayers. His biggest cut — 5. 5 percent — would go to the lowest 20 percent of taxpayers. Obama would raise taxes for the top 1 percent of taxpayers by 7 percent or more.
How the plans affect that top 1 percent — those with incomes above $ 603, 403 — is significant, because they pay 25. 7 percent of the nation’s taxes.
McCain’s 3. 7 percent tax cut for someone in this group would amount to an average reduction in taxes of $ 48, 862. Obama’s 7 percent tax increase for someone in the same group would result in an average of $ 93, 709 in additional taxes.
The difference between the two plans becomes more distinct when it comes to the most welloff of this group — the 0. 1 percent with incomes above $ 2. 87 million, who pay 13 percent of the nation’s taxes. McCain would cut their taxes by 4. 7 percent, or an average decrease of $ 290, 708. Obama would raise their taxes by 8. 9 percent, or an average increase of $ 542, 882. ALTERNATIVE MINIMUM TAX. Both Obama and McCain would extend the Alternative Minimum Tax “ patch” — a measure passed regularly by Congress that shields millions of taxpayers from the tax — and index it for inflation. McCain also would further increase the exemption by 5 percent in excess of inflation after 2013. Essentially, both would continue the current policy, which would mean the Alternative Minimum Tax would continue to hit many taxpayers, although significantly fewer than without the “patch.” In 2009, for example, the Tax Policy Center estimates that the Alternative Minimum Tax would hit about 5 million taxpayers, although the patch would shield another 25 million from its effects. CAPITAL-GAINS TAX. McCain would keep the top rate on capital gains and qualified dividends at 15 percent. Obama would increase the capital gains tax to a maximum rate of 20 percent. PAYROLL TAX. Obama proposes an additional payroll tax to help shore up Social Security. It would take effect 10 years or more in the future at a rate between 2 percent and 4 percent, split between the employer and the employee, for income above $ 200, 000 for individuals or $ 250, 000 for couples. He has not provided further details. CORPORATE TAX RATE. Mc-Cain would reduce the rate from the current 35 percent to 25 percent by 2015. Obama also supports reducing the rate, although he has not specified a percentage, and broadening the corporate income tax base. Both call for closing various loopholes as a way to raise revenue.
INDIVIDUAL IMPACT Taxpayers who want to see precisely how their own tax bill would be affected can use a new online tool to determine just that. By going to www. electiontaxes. com, individuals can plug in their financial information and the Web site will tell them how they would fare under the Obama and McCain plans. The Web site is the brainchild of Gramlich, the Maine accounting professor, who partnered with a business software com-WHO PAYS HOW MUCH Under either the Obama or McCain plan, 95 percent of taxpayers would see their taxes repany, Quantrix, to offer the service to anyone who wants “to cut through the political rhetoric” and objectively compare the impact of the competing proposals, Gramlich explains on the site.
“This is an attempt to try to put it down to the voters’ level. We’re trying to get the truth across,” said Gramlich, who also has written a detailed comparison of the plans that he acknowledged was “difficult for the average citizen to digest.” On the Web site, individuals supply financial data. There is no cost to use the tool, and it does not require identifying information such as names or Social Security numbers.
FEDERAL DEFICIT Ultimately, the test of either plan will be whether Congress will pass its provisions. Although lawmakers would be unlikely to agree to any tax package without making some changes, a new president generally receives some latitude when it comes to enacting his plans. But the situation is more complicated this time around because the next chief executive will face the most difficult economic conditions in generations. And both the McCain and Obama plans come with hefty price tags.
Using figures from the Congressional Budget Office that predict the size of the federal deficit, the Tax Policy Center estimates that Obama’s plan would increase the 10-year cumulative deficit by about $ 3. 6 trillion, pushing it to $ 5. 9 trillion. Mc-Cain’s plan, the center figures, would add $ 5. 1 trillion, increasing the deficit to $ 7. 4 trillion.
In essence, both plans call for cutting taxes — which would reduce federal revenue — but have not fully specified how they would either replace that money or offset the loss by reducing spending. Obama and McCain have said they would close various tax loopholes, particularly in the corporate-tax structure.
But many observers question whether such spending reductions could provide the necessary funds to pay for the tax cuts McCain and Obama want to enact.
“Both candidates’ tax plans depend heavily on raising revenue from ‘corporate welfare’ and similar measures,” the Deloitte Tax analysis says, noting that Congress has targeted many such provisions over the past two decades. But, the report points out, those efforts have been largely unsuccessful — and even if new legislation does pass Congress, the resulting revenue is likely to fall short of either campaign’s projections.
“The most striking thing about this is, in terms of the longterm budget, how similar they are,” said Clint Stretch, managing principal for tax policy at Deloitte Tax.
“These are both proposals that, in total, are not increasing taxes. That means that in terms of taxes, they are not addressing the very serious long-term budget problems the country faces.” Stretch is not the only tax observer critical of the candidates’ plans for failing to address the need for overall tax change.
The closest the candidates come is a pair of proposals aimed at simplifying the process of filing a tax return. McCain has suggested a plan that would allow individuals to determine their taxes under an alternative tworate system, while Obama has suggested the Internal Revenue Service provide pre-completed tax returns that those taking standard deductions can simply verify and submit.
But those measures do not address the looming issues that remain, such as maintaining spending on Social Security, Medicare and Medicaid at a time of record deficits — issues that require difficult choices that observers agree are not likely to be made in the context of a presidential campaign.
“Fundamental reform of our tax system is one way to resolve these problems, but, at least in part because reform creates both winners and losers, the leading presidential candidates have not addressed it seriously,” the Tax Policy Center report says.
Despite such criticism of both the McCain and Obama tax proposals — and even if the plans are never fully implemented — Gramlich believes that analyzing them serves a purpose for voters.
“These plans say a lot about how these presidential candidates will address money issues,” he said. “It may not come out this way, but when push comes to shove, somebody is going to have to pony up the money, and somebody is going to get the benefit. These plans tell a lot about the attitude they would come to office with.”
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