This is the first of a three part series looking at what taxes might be under our new President. This series starts by looking at what might happen under a President Obama. Next week I'll examine John McCain's plans. In the final part I'll compare and contrast the two plans.
Let's start with what the Obama campaign says they'll do.
This is taken from the Barack Obama website: - Cut taxes for 95 percent of workers and their families with a tax cut of $500 for workers or $1,000 for working couples.
- Provide generous tax cuts for low- and middle-income seniors, homeowners, the uninsured, and families sending a child to college or looking to save and accumulate wealth.
- Eliminate capital gains taxes for small businesses, cut corporate taxes for firms that invest and create jobs in the United States, and provide tax credits to reduce the cost of healthcare and to reward investments in innovation.
- Dramatically simplify taxes by consolidating existing tax credits, eliminating the need for millions of senior citizens to file tax forms, and enabling as many as 40 million middle-class Americans to do their own taxes in less than five minutes without an accountant.
These seem like great goals, and a wonderful plan. Let's check this out to see if it's borne out by facts.
Here are the nuts and bolts of the plan:
1. A $500 (single)/$1000 (MFJ) refundable tax credit for those who work.
2. A $4,000 refundable tax credit for college education.
3. A 10% refundable tax credit to offset mortgage interest payments. It's unclear from the fact sheet whether this credit would be available to those who itemize or is limited to those who do not itemize.
4. No income tax for senior citizens who make less than $50,000.
5. An automatic pension account will be created.
6. The Savers Credit will be expanded so that it will match 50% of the first $1000 for families earning under $75,000.
7. Health care tax credits will be increased.
8. Expand the Earned Income Tax Credit to more working parents.
9. The child care credit would be refundable and allow low-income families to receive up to 50% of $6,000 of child care expenses.
10. Add a $7,000 tax credit for purchase of "advanced technology vehicles."
11. Simplify the system; some taxpayers would receive pre-printed forms with numbers already filled-in.
12. Eliminate capital gains taxes on investments in small and start-up firms.
13. Increase corporate tax on companies that "retain their earnings overseas." Use that money to lower corporate tax rates for companies that expand operations within the U.S.
14. Add a refundable corporate tax credit for small businesses that offer healthcare.
15. Make the Research and Development tax credit permanent.
16. Increase the top tax bracket to 39.6% on families making $250,000 or more.
17. Estate tax begins at $7 million per couple ($3.5 million/person).
How would all of these be paid for? Obama wants to reform international tax loopholes, close domestic tax loopholes, eliminate tax breaks for oil and gas companies, and close other loopholes.
But there's more on other areas of the website that impact taxes. Obama wants to "...ask those making over $250,000 to pay in the range of 2 to 4 percent more in total (combined employer and employee)." Originally, Obama wanted to completely uncap the social security tax above $250,000. What's not said here is would this kick in based on individuals at $125,000 or families at $250,000?
Let's assume that Obama is elected President. Let's also assume that Congress continues to be controlled by Democrats. What would the tax impact be for you and I?
1. The wealthy already pay most of the taxes in the U.S. Under a President Obama they'd pay even more. In high tax states such as California the marginal tax rate would end up at 58.8% for those making above $125,000 if employed and 68.7% for those who are self-employed. That's if Obama gets his way. Given the leanings among the Democrats in Congress,
that's likely the best we could hope for under Obama.
2. Obama's tax plan would result in the redistribution of income away from entrepreneurs. Though Obama wants his plan to help entrepreneurs (through elimination of capital gains on investments in small companies), his income tax plan says the opposite. Additionally, there's nothing in Obama's plan about the AMT. Assuming the AMT lives on, those capital gains tax cuts would be imaginary; entrepreneurs wouldn't pay capital gains taxes but they'd pay the same amount as AMT.
3. Obama has proposed a wealth of new programs. Those new programs would have to be funded with money from somewhere. Obama mentions health care, but that's not the only program he proposes. Obama's reliance on "closing loopholes" is misplaced (see #4 below).
4. Obama's primary funding for his tax plan comes from closing various loopholes. Good luck. The IRS has been trying to close various loopholes for years, and increase enforcement activities. Congress writes the Tax Code to benefit lobbyists and others--in the bailout legislation that just passed numerous loopholes were added. As far as international loopholes the IRS has been successful in closing some. The reality is that only incremental progress will occur no matter who is President.
There is no way that Obama will be able to fund his programs and tax cuts solely from closing loopholes.
5. A much more realistic scenario is that under a President Obama only a couple of his programs would be implemented but the tax increases and redistribution plan would occur. This would likely lead have a major negative economic impact (see #6 below).
6. Many large companies are organized as S-Corporations and are taxed on individuals tax returns rather than at the corporate level. (As a reminder, corporate taxes are
always passed on to individuals.) When taxes increase to S-Corporation owners they will likely cut their hiring.
7. It is possible that Congress would go much further with social security taxes than the Obama campaign currently wants. There is sentiment among Democrats in Congress to tax high-income self-employed individuals fully at 15.3% (that is, uncapped social security). If this were to occur many high-income individuals would stop working when their income reached a certain level as the tax would be confiscatory. This occurred in the 1940s and 1950s when marginal tax rates reached 90%. This would have a negative impact on the economy in the United States.
8. The current economic climate is uncertain. Increasing taxes when the economy is not doing well would cause major economic problems. Obama has mentioned this in an interview with Bill O'Reilly.
9. Obama has publicly said he's for the elimination of the Bush Tax Cuts. All of them. The elimination of a tax cut is a tax increase--forget the semantics.
10. The goal of Obama's that makes the most sense--simplification of the tax system--is impossible under President Obama. His programs would tremendously increase the complexity of the Tax Code.
Obama likes to talk in broad terms and doesn't like to be forced to mention specifics. That's true of his stance on taxes. I'll be very specific: If Obama is elected President you will pay more. This may be in taxes, or in the increased cost of goods and services as tax increases on some are passed on. There is no free lunch.
Next weekend I'll report on what taxes might be like under a President McCain. It should be clear that I'm not a fan of Obama's tax plans. For very different reasons I have concerns over McCain's tax plans.
