Obama On Taxes

According to F. Patrick Brown, writing for the Kansas City Star (hat tip to the Tax Profs Blog), Obama's key tax proposals are as follows:

Obama will reinstate the individual income tax rates established in 1994.

While the difference between the highest tax rate in 1994 (39.6 percent) and the highest tax rate in 2008 (35 percent) is less than 5 points, that figure is misleading, because tax brackets increased faster in 1994. For example, in 1994, the maximum rate on taxable income started at $250,000, while in 2008 it doesn’t start until $357,700. . . .

Congressional leaders want to lower corporate income tax rates to be more competitive with our trading partners. Obama wants to redirect corporate tax incentives (credits, deductions and exclusions) to achieve economic and social policy objectives. . . .

Obama will tax dividends at marginal income tax rates and will raise the tax rate on long-term capital gains to 1994 levels (28 percent). . . .

The prior Republican Congress lowered the tax rate and raised the amount of the exemption, but did not repeal the taxes on the transfer of property between generations. With the expiration of the Bush tax cuts in 2011, the higher rates and lower exemptions will be reinstated. The Democratic Congress has also adopted the policy of “mend it, don’t end it.” . . .

American taxpayers pay a Social Security payroll tax on earned income at the rate of 12.4 percent, plus a Medicare payroll tax on earned income at the rate of 2.9 percent. Self-employed individuals pay the entire 15.3 percent, while employees split the tax equally with their employers.

The amount of earned income subject to the Medicare tax is unlimited. The amount of earned income subject to the Social Security tax is limited. . . . in 2008 you will pay $12,648 (12.4 percent times $102,000). . . . Obama would remove any limit on the amount of earned income subject to the Social Security payroll tax. . . .

[Obama proposes an] oil windfall profits tax.

The article fails to note the Obama proposal to "create a new "Making Work Pay" tax credit of up to $500 per person, or $1,000 per working family." The credit would be available to the extent of employee payroll taxes paid by the taxpayer on their first $8,100 of earned income.

Some other notable Obama tax proposals not mentioned are:

* "eliminate all income taxation of seniors making less than $50,000 per year."
* "a 10 percent universal mortgage credit to provide homeowners who do not itemize tax relief,"
* a reform of "the Child and Dependent Care Tax Credit by making it refundable and allowing low-income families to receive up to a 50 percent credit for their child care expenses,"
* a "universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students," and
* a proposal to "increase the number of working parents eligible for EITC benefits, increase the benefits available to parents who support their children through child support payments, increase benefits for families with three or more children, and reduce the EITC marriage penalty, which hurts low-income families."

Last year, Obama introduced legislation in the Senate to establish "a tax credit to companies that maintain or increase the number of full-time workers in America relative to those outside the US; maintain their corporate headquarters in America; pay decent wages; prepare workers for retirement; provide health insurance; and support employees who serve in the military."

Obama favors giving "the Treasury Department the tools it needs to stop the abuse of tax shelters and offshore tax havens" and "eliminating special-interest loopholes and deductions, such as those for the oil and gas industry."

Finally, Obama also proposes to allow the IRS to generate a starting point tax return for them based upon information returns already filed with the IRS.

The overall design of the tax plan resembles that of the Clinton administration, with moderately high taxes on the well to do, although not in any purist fashion that, for example, equates earned and unearned income as a matter of principle, accompanied by many targeted tax credits.

Would These Proposal Be Enacted?

If Obama wins the general election, it is likely that he would do so with Democratic majorities in the House and the Senate. The Democratic majority in the Senate would likely be largely than it is now, although a 60 vote filibuster proof majority would be a stretch and even with 60 Democrats in the Senate compromise may often be necessary with conservative Democrats in that chamber.

While a President Obama is likely to get some semblance of his tax agenda enacted, Congress is particularly strong vis-a-vis the President on the issue of tax policy, and indeed, democratic government in England, France and the United States was strongly motivated in each case by a desire to give democratically elected representatives a say over tax policy. Thus, Obama is unlikely to get precisely what he proposes, even though all of his proposals will receive a fair hearing.

For example, I suspect that it is unlikely that Obama will actually secure elimination of the earnings cap on Social Security payroll taxes, if elected, although he would probably secure a substantial expansion of that tax base.

Similarly, while Obama is likely to secure a return of the 1994 income tax brackets (including the 39.6% bracket), it is likely that the brackets would largely track the existing income cutoffs, rather than those in place in 1994.

In all likelihood, some, but not all, of the tax credits proposed will become law.

My best guess with regard to the gift and estate tax is that Congress will decide to lock in the tax rates and exemptions in place in 2009 (i.e. 45% of the taxable transfers in excess of $3,500,000 of taxable gifts and bequests in a lifetime).