Comparison of the Tax Policies of the Democratic and Republican U.S. Presidential Candidates - Coursework Example

Tax Accounting Assignment A Review, Comparison and Contrast of the Tax Policies of the Democratic and Republican U.S. Presidential Candi s Sahar, November 2008 The state tax as well as general fiscal policy is expected to be a significant component of President elect Barack Obama’s overall domestic policy when he assumes the role of presidency in January 2009. We shall review the proposals his Democratic party made during the election campaigns and compare and contrast these with those of the Republican candidate McCain, whose policies would have been the likely alternative. Both candidates proposed major changes and this was a big issue in the campaigns, but they took very different approaches from each other. The thrust of each though was to respond to the downturn in the US economy. As it is, Obama’s policy seems to be more progressive in this regard whereas McCain’s was feared to be substantially less so, especially among very high income taxpayers. However, some experts believe that neither is really effective enough to deliver on this target, which at this time in US economic history has become a dire need. With respect to revenue generation for the government, which is the very purpose of taxation, Obama’s policies are thought to be able to deliver more. Income tax is by far the main type of tax according to the revenue it provides and the fact that it affects the greatest number of people. Therefore, our first focus will be on the policies that concern this source of taxation, both individual and corporate income tax. Then we shall look at the other types of taxes with the same view of reviewing, comparing and contrasting the policies of Obama and McCain, as well as the issue of tax reform. Income Taxes (Individual and Corporate) John McCain decided to make the 2001-03 tax cuts permanent. Barack Obama also plans the same except for the two top rates of 33% and 35%, which would rise to 36% and 39.6% respectively. In addition, Obama proposed to eliminate all income taxation of seniors making less than $50,000 annually. The complication with Corporate Income Tax is that it is officially a tax on the profits of corporation but in effect is borne by individuals to whom the cost is passed on viz. employees, consumers and shareholders. This means that people actually pay tax twice; on their own personal income plus an additional portion in the form of reduced wages, a higher cost of goods or services, or a lower dividend. Moreover, some states levy their own corporate income tax besides the federal government. Corporation tax also has a bearing on America’s competitiveness in the global marketplace. Barack Obama has major plans in relation to Corporate Income Tax as part of his efforts at tax reform. He firmly plans to eliminate capital gains taxes on start-up and small businesses (barackobama.com), and closing ‘inefficient loopholes’ discussed under The Issue of Tax Reform. McCain had no such overhaul plans but did propose to cut the rate to 25% from the current 35% in phases by 2015. Social Security and Payroll Taxes, Estate and Gift Taxes, and Capital Gains and Dividend Taxes One problem with the demographics of America as far as Social Security and Payroll Taxes is concerned, is the falling birthrates and increasing number of people retiring. The result is a reduction in the number of people of working age. The consequence for tax collection is then obvious and the need for a strategy to effectively address this problem is thus clear. The question is how did the two candidates seek to resolve this potential shortage of cash due to the changing times? Obama has set the Social Security tax for those with an income up to $102,000 at 12.4%; from $102,000 to $250,000 at 0%, and above $250,000 at 4% with effect from 2018. On the other hand, McCain supports supplementing the current Social Security system with personal accounts, and opposes increasing the payroll tax from the current 12.4% on wages up to $102,000. Taxes on the transfers of wealth called Estate and Gift Taxes are another source of revenue for the government. However, this tax tends to have the effect of discouraging entrepreneurship and also leads to large tax compliance costs. Obama’s rate of Estate Tax has been set at 45% applicable on estates over $3.5 million, or $7 million for married couples. As expected, McCain’s rate was a much lower figure of 15% and that too only payable on estates over $5 million, or $10 million for married couples. Thus estate tax is one area that illustrates the different approaches of the two candidates in terms of the relative amounts they are applying and who they are targeting. One of the most controversial issues in taxation is the tax on shareholder dividends and capital gains because it becomes a double tax for the individuals to have to pay. Firstly. Corporations pay Corporate Income Taxes on their profits. But then after distributing the remainder to its shareholders in the form of dividends, further tax applies on these individual dividends. In effect, the combined tax can potentially become very high and as a result there is reluctance to invest. At a national level, this can impede economic growth. McCain suggested making no changes to the existing 15% rate on capital gains and dividends because “entrepreneurs should not be taxed into submission” (McCain, 2008). But not surprisingly, Obama raised the top capital gains and dividend rates to 20% for those couples who are making over $250,000. The Alternative Minimum Tax (AMT) The Alternative Minimum Tax (AMT) purports to make high-income taxpayers add back some of the untaxed income that is not included in the normal calculation of income tax. In other words, it is a provision so that high-income taxpayers pay more on their income instead of what would otherwise have been left out due to the numerous tax deductions, exclusions and exemptions. It is a way of outwardly making the system of taxation seem fairer so that those who ought to pay more are made to do so. This is one area that shows a stark contrast between Obama and McCain. Whereas Obama has planned to extend the AMT patch, McCain decided to phase it out. The latter had directed his tax policies at encouraging small businesses. Other miscellaneous taxes As far as other taxes are concerned not already covered above, both presidential candidates put various policies forward. Significantly, Obama restored the phaseout of personal exemptions and itemized deductions for couples making $250,000 or more (a $50,000 lower figure applies for singles). He created a new ‘American Opportunity Tax Credit’ for higher education expenses up to $4,000, a new ‘Making Work Pay’ refundable income tax credit of up to $500 per person or double this amount per family, and a 10% mortgage credit worth up to $800. To encourage research and development, he made the R&D Tax Credit permanent “so that firms can rely on it when making decisions to invest in domestic R&D over multiyear timeframes.” (Obama, B, 2008). Obama also made a number of tax credits refundable. For example, the Making Work Pay income tax credit already mentioned, the Child and Dependent Care Tax Credit, the Retirement Savings Credit, and $3,000 for businesses hiring each additional full-time employee. To help small businesses, he increased their expensing limit to $250,000. And, to help people at the lower end he eliminated the current tax on unemployment benefits and on hardship withdrawals from IRAs and 401ks. The latter policies outlined above are part of Obama’s wider short term economic plans and particularly targeted at the middle classes. Obama’s tax policies in respect of these other taxes are far more extensive in comparison to what McCain had proposed. Also, the focus was different too. McCain dealt more with health care. He proposed a new refundable health care tax credit of $5,000 for families ($2,500 for individuals). This was to replace the present exclusion for employer-based health insurance premiums. Apart from this, he intended to increase the dependent exemption on a yearly basis until it reached $7,000 in 2016. As far as taxation in the context of McCain’s wider short term economic plans were concerned, his policies were aimed at reducing various tax rates. For example, he proposed reducing capital gains tax from 15% to 7.5% (in 2010), and the tax rate on withdrawals from IRAs and 401ks to 10% instead of eliminating it as Obama decided. He did however intend to eliminate tax on unemployment benefits exactly as Obama had also decided. So, this particular last instance was a point of agreement of the two sets of policies. The Issue of Tax Reform As mentioned in the introduction, the purpose of taxation is to raise revenue for the government. This money funds the various government departments, policies, projects and programs for the ultimate benefit of the state citizens, or so it is officially intended. The nature of this relationship however is a sensitive one because people are wary of the fairness of taxation in the first place, and with how and where the money is spent. The issue is how best to alleviate the burden of taxation and allay these concerns; for the government to achieve its objectives and keep the taxpayers content at the same time. This requires transparency on the part of the government and an efficient and simple system of taxation that is based on fairness for all. The US tax system has traditionally been perceived in a negative light i.e. as being complex, unfair and inefficient. For this reason the issue of tax reform has taken on particular importance. Unfortunately, both candidates offered very little information with respect to the specifics of tax reform, though they did vaguely promise to make some real reforms. McCain’s reforms are to allow taxpayers to choose between either the current system or “a vastly less complicated system with two tax rates and a generous standard deduction”. (McCain, 2008) Of the two candidates however, Barack Obama appears to be the most inclined towards some serious measures of introducing reform. He recognised that “Our tax code is riddled with special interest loopholes that allow some corporations and wealthy individuals to avoid paying their fair share of taxes” and consequently suggested moves to “aggressively…close inefficient loopholes” particularly with regard to Corporation Tax. Specifically, his proposals target companies that ship jobs overseas, oil and gas companies, closing the CEO pay loophole, and clarifying the economic substance doctrine so as to increase reporting of capital gains. In addition, other reforms aim to crackdown on international tax havens and he mentions adjusting a portion of the Bush tax cuts for families earning over $250,000. Besides this, Obama’s reforms include reducing the complexity of the tax system and making the IRS provide pre-prepared tax forms. A Further Comparative Analysis The US system of taxation during this time of deep financial crises in America needs not only to undergo a suitable reform to make it fairer and therefore acceptable, and simpler so that it can be easily understood and managed, but also to effectively respond to the desperate economic needs of the country. To this end I don’t believe either of the two presidential candidates were able to formulate a workable taxation policy to lead America through the present crises and into the next decade. Both set of policies take a very ‘defensive’ and ‘introverted’ approach in my opinion because they seem to be designed around damage limitation rather than being a concerted effort at stimulating growth in the economy. As for trying to make American goods and services more competitive, this has not been given a priority at all nay ignored by both parties. In fact, to put it bluntly, US Corporation Tax especially remains very anti-competitive and out of synch with the rest of the world. As for AMT, it is an unnecessary addition to the long list of taxes – not because high income tax payers should not pay higher taxes (they ought to) but because its existence demonstrates the complexity of the US Individual Income Tax in that it is poorly designed in favour of the rich., The candidates should have worked on simplifying the existent Income Tax system so that the numerous deductions, exclusions and exemptions can effectively reduce the taxable figure for those who deserve it whilst not reducing it for those who should be paying more tax because they can afford it. Obama made some limited proposals for AMT but strangely, McCain proved better in a way by proposing to phase it out. However, if it was phased out, McCain failed to make alternative arrangements for making the higher income taxpayers pay more. But then it would have been even strange if he did that because his policies overall are designed to favour this class. We have seen many differences in the approach between the two sets of policies. But if there is any similarity in the consequences that these policies would bring about, it is a predictable increase in financial deficit. According to estimates by the Tax Policy Center in June 2008, “over 10 years, McCains tax proposals could increase the national debt by as much as $4.5 trillion with interest, while Obamas could add as much as $3.3 trillion”. (Sahadi, J.) And, for the simple reason that both would fail to raise sufficient revenue given the projected government costs and the fact that the 2001 and 2003 tax cuts are to expire by 2011. Roberton Williams of the Tax Policy Center on describing the nature of the two plans said: “Distributionally, theyre markedly different. But in terms of their impact on revenue, the two plans are not terribly different," (ibid) The deficit scenario is based on the assumption that the 2001 and 2003 tax cuts are allowed to expire. Actually, both candidates intend to make these cuts permanent except that Obama would not make it apply to those who earn more than about $250,000. The effect on specific income groups is a good way of comparing the two sets of policies. Many changes are made and figures adjusted but the real question has to be asked how it all affects typical types of people. “Relative to the candidates’ preferred baseline,the Obama plan would reduce taxes for low- and moderate-income families, but raise them significantly for high-bracket taxpayers.“ (William G. 2008) This statement puts the answer in a nutshell as far as Obama’s policies are concerned. McCain’s policies are put simply the opposite. This of course was fairly predictable to many, namely the close connection of tax policies with party politics. The general characteristics of the tax proposals of both candidates are fairly predictable and reflect the philosophy and tendencies of their respective political parties as evidenced by their past policies too. Both candidates differ in the extent to which they target particular classes, companies and income categories. McCain is less reluctant to tax high income earners whereas Obama’s tax policies show an attempt at redistribution of wealth by helping low income earners, talks of rescue packages, and making the upper classes pay more. Thus Obama’s tax policies favour the middle classes as expected whereas McCain’s proposals were typically Republican with the net effect that higher taxpayers would have seen a greater reduction in after tax income than those at the lower end. In other words, I think Obama’s claim that McCain planned to give big tax cuts to the wealthy is an accurate description. The Tax Policy Center reached a similar viewpoint. It summarised the bottom line of its analysis as follows: “Obama and McCain tax plans would have radically different effects on the distribution of tax burdens in the United States. The Obama tax plan would make the tax system significantly more progressive by providing large tax breaks to those at the bottom of the income scale and raising taxes significantly on upper-income earners. The McCain tax plan would make the tax system more regressive, even compared with a system in which the 2001–06 tax cuts are made permanent. It would do so by providing relatively little tax relief to those at the bottom of the income scale while providing huge tax cuts to households at the very top of the income distribution.” (Tax Policy Center) Obama’s tax policies are more equitable and fairer in my opinion but they still do not go far enough to encourage growth to lead America into the future in this current changed economic environment. McCain’s proposals simply went in the wrong direction because it entailed much less revenue for the government. I neither have faith in either of the two sets of tax policies in this regard, nor do I believe that any real attempt at a simplification of the US tax system has been made. This I think owes itself to political failure per se and strategic incompetence due to underestimating the scope of the current financial crises. The only minor benefit I’ve noticed is the welcome tax on carbon emissions that both candidates endorsed. Seriously though, Obama’s policies are somewhat better overall because of the equitable factor, but just not far reaching enough to prevent the shrinking of the US economy. References McCain, John. 2008. Taxes: Simpler, Fair, Pro-Growth and Competitive. Jobs for America. Retrieved November 29, 2008 from: http://www.johnmccain.com/Issues/JobsforAmerica/taxes.htm McCain, John. 2008. Press Release. Retrieved November 29, 2008, from: http://www.johnmccain.com/Informing/News/PressReleases/1ad1df45-57a9-4bd4-b71f-9d5c011d14c5.htm McCain, John. (2008). Informing Issues. Retrieved November 29, 2008, from: http://www.johnmccain.com/Informing/Issues/0B8E4DB8-5B0C-459F-97EA-D7B542A78235.htm, http://www.johnmccain.com/Informing/Issues/19ba2f1c-c03f-4ac2-8cd5-5cf2edb527cf.htm, http://www.johnmccain.com/Informing/News/PressReleases/6548c935-9534-40c9-b780-5c435ecc5767.htm McCain, John. (2008). Supporting Small Businesses. Retrieved November 29, 2008 from: http://www.johnmccain.com/Issues/JobsforAmerica/smallbusiness.htm Obama, Barack. 2008. Economy. Retrieved Novmeber 29, 2008 from: http://www.barackobama.com/issues/economy/ Obama, Barack. 2008. Barack Obama’s Comprehensive Tax Plan. Retrieved November 29, 2008, from: http://www.barackobama.com/pdf/taxes/Factsheet_Tax_Plan_FINAL.pdf Obama, Barack. 2008. Barack Obama and Joe Biden’s Rescue Plan for the Middle Class Retrieved November 29, 2008 from: http://www.scribd.com/doc/6523359/Barack-Obama-and-Joe-Bidens-Rescue-Plan-for-the-Middle-Class Tax Foundation. 2008. Presidential Candidate Tax Plan Comparison - Election 2008. Retrieved November 29, 2008 from: www.TaxFoundation.org Tax Policy Center. 2008. An Updated Analysis of the 2008 Presidential Candidates’ Tax Plans: Revised August 15, 2008. Washington Post. 2008. Retrieved November 29, 2008 from: http://www.washingtonpost.com/wp-dyn/content/article/2008/07/13/AR2008071301643_pf.html William G. Gale and Benjamin H. Harris. 2008. Taxes under Obama and McCain. Economists’ Voice. The Berkeley Electronic Press. Retrieved November 29, 2008, from: www.bepress.com/ev October, 2008 Read More