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A Familiar Call for Change.

A Familiar Call for Change.

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Published by McMillan Consulting

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Published by: McMillan Consulting on Oct 29, 2008
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06/16/2009

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Tax platorms o the presidential candidates
Tax
September 2008
A amiliar call or change
.
 
A amiliar call or change
Tax platorms o the presidential candidates
Three modern presidents have come into oce with ully developed tax plans at the centero their campaigns that they then advanced early in their respective administrations: RonaldReagan in 1981, Bill Clinton in 1993, and George W. Bush in 2001. In contrast, McCain andObama have not moved immediate action on taxes to the very oreront o their campaigns.Thus ar, they have addressed tax policy only in broad strokes: the tax proposals they discussin their speeches and position papers are oten lacking in technical details and have beenmodied throughout the campaign. Moreover, both camps are discussing health care andenergy with at least equal ervor, which suggests that broad-based tax proposals may notlead the agenda next year no matter who wins the election. Indeed, we may not see any ullyfeshed-out proposals until ater the election is over and the new elected president sends hisrst tax and spending package to Congress next February.That said, a number o actors should drive the next president as well as the next Congress toaddress taxes in the coming two years:First, nearly all o the 2001 and 2003 tax cuts will expire at the end o 2010, leavingdecisionmakers with the choice o extending part or all o those tax cuts or allowing themto lapse. (See the table that ollows this report or a list o expiring provisions.)Second, the individual alternative minimum tax (AMT) will continue to capture millions otaxpayers and orce them into a system that was originally implemented to ensure that onlythe wealthiest taxpayers did not escape tax liability.Third, the estate tax will drop to a rate o zero eective or 2010, but return to pre-2001rates o up to 55 percent with a $1 million exemption in 2011 i not reormed in somemanner.Finally, i the tax law is extended to preserve the rules that existed in 2007, projectedbudget decits over the next 10 years would exceed $7.2 trillion (according toCongressional Budget Oce estimates). Projected spending increases on Social Security,Medicare, and Medicaid due to the retirement o the Baby Boom generation also will strainthe revenue sources o the ederal government or years to come.With all this in mind, even though we cannot predict who will occupy the White House in2009 or exactly where tax policy will t into the next president’s agenda, it is still possibleto oer some insights on signicant tax proposals that could come out o a McCain or anObama administration and how they might be received in Congress.
With the campaign or the White Housenow in ull stride, Republican presidentialnominee Sen. John McCain o Arizona andDemocratic nominee Sen. Barack Obamao Illinois are positioning themselvesas candidates who will change the wayWashington works. But while each hasindicated that changing the tax code willplay a key role in advancing his agenda, it isnot readily apparent that either one intendsto advance signifcant tax reorms during hisfrst 100 days or even his frst year in ofce.
 
A amiliar call or change
Tax platorms o the presidential candidates
Following party orthodoxies
Both McCain and Obama have denite ideas on the direction in which they would take theincome tax system. But despite their emphasis on change, their proposals as articulated thus arin the campaign refect the very traditional debate over how progressive the tax system shouldbe — that is, how the burden should be distributed between the middle class and the wealthy.McCain’s tax plan would take an orthodox Republican approach by maintaining the 2001and 2003 Bush tax cuts, increasing the estate tax exemption while decreasing the tax rate,increasing the personal dependent exemption or individual taxpayers, and lowering corporatetax rates. McCain also has stated that he will oppose any new taxes as a means to und hisproposals. This robust plan represents a signicant commitment to slashing governmentspending i decits are to be controlled. According to an analysis by the nonpartisan Tax PolicyCenter (TPC), the McCain tax plan would result in ederal revenues equal to 17.6 percent ogross domestic product (GDP). For the 2007 through 2009 scal years, revenues are projectedto average 18.4 percent o GDP and spending 20.8 percent.Obama ollows Democratic orthodoxy by proposing higher taxes on the wealthy (which hiscampaign denes as joint lers with annual incomes above $250,000 and single lers withincomes above $200,000) to pay or tax cuts and benets or the lower and middle classes.Like the McCain plan, Obama’s tax plan seems to imply a commitment to signicant spendingreductions. According to the TPC analysis, the Obama tax plan would result in ederalrevenues equal to 18.2 percent o GDP.Both candidates are committed, in general terms, to closing largely unspecied business andother perceived loopholes. Interestingly, neither is calling or a wholesale replacement o thecurrent income tax system or the enactment o a new additional tax, such as a national retailsales tax or a value-added tax.
The big picture
The McCain and Obama tax plans can be analyzed in three large pieces: individual income taxproposals, estate tax proposals, and business income tax proposals.With respect to individual income taxes, both candidates would reduce collections belowthe aggregate amounts collected under present law, but they would do so very dierently.McCain would make virtually all o the Bush tax cuts permanent and extend urther tax relieto amilies with children or other dependents. In the aggregate, Obama would, based on TPCnumbers, collect less in individual income taxes than McCain, but he would do so by raisingtaxes on joint lers earning more than $250,000 and individuals earning more than $200,000while preserving the Bush tax cuts or taxpayers alling below that income level and adding anarray o specially targeted tax incentives and reundable tax-relie provisions.Both candidates would create an estate tax system that exempts all but a tiny raction oestates rom tax. Taxable estates would ace very dierent burdens due to a lower exemptionand higher tax rate on the remaining value. Over a 10-year period, estate tax collections underthe Obama plan would exceed collections under the McCain plan by about $300 billion.In terms o total revenue collections, the most dramatic dierence between the twocandidates may be in their treatment o corporate taxes. McCain would provide a signicantnet reduction in corporate tax burdens through a reduced corporate tax rate, but would osetsome o that reduction through the elimination o “corporate welare” provisions in the taxcode. Obama has expressed support or lowering the corporate rate as well, but proposesto raise signicantly higher revenue through specic revenue osets and other unidentied“loophole” closers.
Is undamental tax reormon the horizon?
Neither candidate is discussing proposals toundamentally reorm or replace the currenttax system. McCain, however, has suggestedallowing individuals to determine their taxesunder an optional alternative two-rate taxsystem with a generous standard deductionand increased personal exemption. Obamaoers to provide standard-deduction lerswith prelled-in tax orms that they canveriy and submit.In the past, tax reorm has occurred atera substantial period o consensus buildingabout the kinds o tax to impose and thelevel o revenue that is required. We do notsee such an emerging consensus. Reormlikely cannot become a reality until Congressand a president begin to agree on how todeal with the rapid growth o entitlementspending and other issues.
The sources or our analysis
This document relies on a variety osources, including the McCain andObama campaign Web sites and analysesrom the Congressional Budget Oceand congressional Joint Committee onTaxation. We also have relied heavily onextensive reporting on, and analysis by,the nonpartisan Tax Policy Center, whichpublished “An Updated Analysis o the 2008Presidential Candidates’ Tax Plans.” The mostcurrent version o the analysis is available atwww.taxpolicycenter.org. We relied on theSeptember 12, 2008, update.

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