The coming elections will bring a new administration, and with it, a change in focus on how best to stimulate the economy, control the deficit, and pay for desired programs. All of these items will have a direct impact on tax legislation affecting corporations and individuals. While we cannot predict the outcome of the elections or what changes in tax laws may come about, we can offer some insight about the current thinking on future tax policy.
The nonpartisan Urban-Brookings Tax Policy Center has reviewed the tax proposals of the two major presidential candidates. According to the study, the rich would pay more under Barack Obama's tax plan, while the poor and middle class would pay less. John McCain's plan would significantly reduce taxes for the rich, slightly reduce taxes for the poor and middle class, and increase the deficit substantially, according to the study.1
Barack Obama. Obama says he would hike several taxes on people making more than $250,000, including Social Security taxes and the amount they pay on capital gains. Currently, the top income tax rate is 35 percent. Under the Obama plan, that would go back up to 39.6 percent. Obama's staff told the Tax Policy Center he would raise the capital gain tax rates for people in the top two brackets (married taxpayers making more than about $200,000, or single individuals with taxable income over about $165,000). People in those tax brackets would see the tax rate on their capital gains hiked from the current 15 percent to 20-28 percent. Obama's plan calls for no Social Security tax on income between $102,000 and $250,000, but all income above $250,000 would be taxed for Social Security. The 95 percent-plus of the American population that earns less than $250,000 would receive a $500-per-worker tax credit for people who earn less than $150,000 and do not itemize, and a $4,000 credit per child in college. Seniors who earn less than $50,000 would pay no income tax. Obama would leave the top corporate tax rate at 35 percent.
John McCain. McCain would make permanent most of the tax cuts President Bush has already enacted, including those that benefit the middle class, such as elimination of the marriage penalty and the increase in child credits. He would also keep cuts that benefit the wealthy, such as the elimination of the highest income tax brackets. McCain would also double the dependent exemption from $3,500 to $7,000, benefitting big families of all incomes. McCain would cut the corporate tax rate to 25 percent. Largely because his tax proposals would leave tax breaks for the wealthy in place, McCain's plan would cost the U.S. Treasury more than Obama's, the Tax Policy Center found.
Views On The Estate Tax. The two candidates differ widely in their approach to the estate tax, which the Republicans call the "death tax." McCain would set the tax rate at 15 percent for estates above $5 million. Obama would make permanent the estate tax provisions scheduled to take effect in 2009. Those provisions impose an estate tax of 45 percent for estates above $3.5 million. Neither candidate proposes a full repeal of the estate tax.
Cost Of Tax Reform. The precise cost of the candidates' proposals depends on whether you assume the Bush tax cuts, most of which are scheduled to expire in 2011, would be renewed or would be allowed to lapse. Simply allowing the Bush tax cuts to expire would increase federal revenues by about $3 trillion over the next ten years. Compared to these higher levels, Obama's plan would actually reduce tax revenues by about $2.7 trillion over ten years, while McCain's plan would reduce revenues by about $3.6 trillion. Both candidates prefer to score their tax proposals against a "current policy" baseline, which assumes that the Bush tax cuts and the AMT patch would be made permanent. Compared against this benchmark, Obama's plan would bring in an additional $300 billion in tax revenues over the next ten years, while McCain's would cost the Treasury about $600 billion.
Early In The Game. It is important to note that the tax policies reviewed by the study are the candidates' current proposals. At this point that's all they are – proposals that may or may not get through Congress. They don't take into account wars, whether the President will sign an expensive social program into law, or the world economy. Much of the actual tax changes will be driven by Congress. It is, after all, the House of Representatives that has the primary responsibility for writing tax legislation, with the approval of the Senate and the White House being required before any bill becomes law.
The House Races. The House currently has 236 Democrats and 199 Republicans. While every House seat is up for re-election, incumbents traditionally have an upper hand in getting re-elected. Thirty-three incumbents are voluntarily retiring from the House, 7 of whom are Democrats and 26 of whom are Republicans.
The Race In The Senate. The current composition of the Senate going into the 2008 election consists of 49 Republicans, 49 Democrats, and two independents (Bernie Sanders of Vermont and Joe Lieberman of Connecticut, who both caucus with Democrats). Only one-third of Senate seats come up for re-election every two years, but with special elections in Wyoming and Mississippi, a total of 35 seats will be contested this year. Of the seats up for election in 2008, 23 are held by Republicans and 12 by Democrats. Five incumbent Republican senators have announced that they will not run for re-election. All 12 incumbent Democrats are running for re-election. This unusual mix of races makes this year's Senate contest one of the most wide-open races in recent times.
Stay Tuned For More. While no one can predict the outcome of the elections, we can be sure that change will come. We will do our best to keep you posted as new tax policy develops.
Footnote
1. The full report can be viewed at: http://www.taxpolicycenter.org/publications/url.cfm?ID=411693.
