Obama Proposals Would Tilt Tax Code to Self-Employed, Wage Earners
Second in a Series: During the Watergate scandal that led to the downfall of President Nixon in the 1970s, a murky figure identified only as "Deep Throat" gave two young reporters some advice to help them unravel the case: "Follow the money." Since then, it's become a catchphrase of American politics, and it's still good advice when it comes to unraveling political promises, especially involving taxes and spending.
Presumptive presidential candidates Barack Obama and John McCain have both put forth sweeping tax proposals that will shape the American economy for the next decade. It's only one of a number of areas where Republican McCain and Democrat Obama bring distinctively different philosophies to bear. But for small businesses, it may be one of the most critically important issues in the campaign.
In last week's column, the first in this series, I gave a broad overview of the two candidates' proposals. Most of the data is contained in a new report by the Tax Policy Center of the Urban Institute and the Brookings Institution. It provides the best analysis yet of the candidates' respective positions. As the study pointedly notes, tax and fiscal policy will loom large in the next president's domestic policy agenda. This week's column takes a closer look at Democrat Obama's proposals. Next week, I will do the same for Republican McCain's proposals. As Deep Throat advised, we'll try to follow the money.
If there is one hallmark of the Obama proposals, it's his broad promise to extend tax cuts to lower- and middle-class Americans while cutting benefits to the wealthiest Americans. At the center of his plan are promises to extend the child care credits and marriage bonuses and penalties. He will maintain the 10 percent, 15 percent, 25 percent, and 28 percent income tax brackets. He would also lower tax rates on capital gains and qualified dividends for taxpayers in those four tax brackets.
But he would reinstate the 36 and 39.6 percent tax brackets for wealthier households and increase the rate on capital gains and dividends for taxpayers in those brackets. The study assumes a 25 percent tax rate for capital gains and qualified dividends.
Obama would also restore the phase-outs of personal exemptions and itemized deductions, but set the income threshold at $250,000 for married couples filing jointly. As under current law, the thresholds for the phase-out of personal exemptions would be lower for singles and heads of households, but those for the phase-out of itemized deductions would not vary with filing status.
The thresholds would be indexed for inflation as they are under current law. Obama would also extend several smaller expiring tax cuts, including the adoption credit and the simplifications to the earned income tax credit.
Here is a synopsis of other key proposals in his tax policy platform:
Estate Taxes: Obama would make permanent the estate tax law in its 2009 form. That includes an exemption from taxes on estates of less than $3.5 million and a top tax rate of 45 percent. The study assumes the exemption would remain fixed in nominal terms as it is under current law and that the state death tax would remain deductible and not revert to a credit.
Making Work Pay Credit: This new proposal would be a refundable tax credit for wage earners and the self-employed. The credit would equal 6.2 percent of up to $8,100 in earnings, yielding a maximum credit of about $500. Spouses filing jointly could each claim the credit based on their own earnings. All thresholds would be indexed for inflation after 2009. The credit is intended to offset some of the regressive Social Security payroll tax and encourage low-income people to work, but it does so at a substantial cost -- $728 billion over 10 years, the study notes.
Universal Mortgage Credit: Under current law, taxpayers who itemize their deductions may deduct mortgage interest. Obama has proposed a refundable credit equal to 10 percent of mortgage interest for non-itemizers, up to a maximum credit of $800 (indexed after 2009).
Savings Incentives: Tax-favored retirement accounts would be changed to improve incentives to contribute to them. Automatic 401(k) plans would become mandatory for employers offering retirement plans, simply requiring employees to opt out instead of opting in. Employers who do not sponsor other retirement plans would have to offer access to automatic IRAs via a payroll deduction. If an employee does not opt out or specify an IRA account, the employer would automatically contribute a share of earnings to a designated employee account.
His plan also calls for a new saver's credit that would be fully refundable and would equal 50 percent of qualified retirement savings contributions up to $500 for an individual and $1,000 for a couple (for a maximum credit of $250 and $500, respectively). The credit would phase out at a 5 percent rate when AGI exceeds $32,500 for individuals and $65,000 for couples. The credit thresholds would be indexed for inflation after 2009.
American Opportunity Tax Credit: Current law allows a nonrefundable credit of 100 percent of the first $1,200 of qualified higher educational expenses and 50 percent of the next $1,200 up to a maximum of $1,800 per student (in 2008). Obama would make it a fully refundable, 100-percent tax credit for the first $4,000 of expenses. The credit would go directly to the college or university.
Earned Income Tax Credit: Obama has proposed several expansions to the earned income tax credit. He would increase the maximum amount of earned income on which the credit for childless workers is calculated and increase the amount at which the phase-out begins, and in 2012 it would be indexed for inflation. He would double the phase-in and phase-out rates for childless workers who pay child support from 7.65 to 15.3 percent. Thus, their maximum tax credit would double from $555 to $1,110 in 2012.
Obama would also increase the credit rate from 40 to 45 percent for taxpayers with three or more children (but keep the phase-out rate at 21.06 percent). Finally, the phase-out threshold for joint filers would be $5,000 higher than for heads of household (up from $3,100 under current law) and that amount would be indexed for inflation after 2009.
Child/Dependent Care Credit: The child and dependent care credit is a nonrefundable tax credit available to individuals paying for child care needed so they can either work or look for work. Obama's tax plan would make the credit refundable and increase the maximum rate from 35 to 50 percent. It would also increase from $15,000 to $30,000 the threshold at which the credit rate begins to phase down and reduce the rate by 2 percentage points (rather than the current 1 percentage point) for each $2,000 or fraction thereof above that level. The minimum credit rate would remain 20 percent and would apply to taxpayers with income above $58,000.
Senior Income Tax Exemption: Seniors earning less than $50,000 would be exempt from income taxation. Those entitled to a net refund from the government would remain entitled to that refund. The threshold would be the same for both single and married households and would not be indexed for inflation (so its value would erode over time).
R&D and Renewable Energy Production Credits: Obama would make these permanent.
Corporate Taxes: Obama has proposed taxing carried interest as ordinary income, eliminating all oil and gas loopholes, and requiring publicly traded financial partnerships to pay the corporate income tax. He would sanction countries that act as international tax havens and refuse to share financial information with the United States.
He would impose a windfall profits tax on oil and gas companies, require information reporting of basis for capital gains, reallocate multinational tax deductions, and close loopholes in the corporate tax deductibility of pay for chief executives. Combined with other as-yet-unidentified provisions, the campaign expects these provisions to raise $76 billion in revenue each year, according to the study.
Overall, the Obama plan would provide the largest tax breaks, measured as a percentage of after-tax income, to the bottom fifth of income earners compared with current law. Each succeeding fifth would, on average, receive a tax cut, but those at the very top of the income ladder would pay more. The increase in taxes would be dramatic for those at the very top of the income scale, representing 8.7 percent of after-tax income for the top 1 percent of households and 11.5 percent of income for the richest 1 in 1,000, the study notes.
Next week's column will look at McCain's proposals in more detail. The difference in the distributional effects of the two plans is stark, and the money will flow in a decidedly different direction.
