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Obama, McCain and Your 2009 Income Tax Bill

Politics / US Politics Sep 11, 2008 - 02:52 AM GMT

By: Money_and_Markets

Politics

Best Financial Markets Analysis ArticleNilus Mattive writes: With the national conventions behind us, and a series of debates now on the horizon, today I want to give you a little preview of what each of the two major party's candidates might do to our tax bills in 2009.

Before we go any further, I want to make something absolutely clear: I'm not endorsing either candidate's platform. I don't think they go nearly far enough in terms of true reform.


Besides, as guys like Ron Paul have been pointing out, the real problem is that our government is simply spending too much money in the first place! But that's a rant for another day.

Today, I just want to give you a straightforward look at what kind of possible changes are on the horizon, and then tell you about some more aggressive measures that I wish the candidates would consider. Let's start with ...

The Tax Policy Institute's Latest Study on Obama and McCain's Tax Platforms

To give you a quick look at what each candidate might do to your tax bill, I wanted to share the findings of the Tax Policy Center's latest study on the matter (updated on August 28).

Hey, I know we can't really trust even this "nonpartisan" organization (or anyone, for that matter) to paint a completely unbiased picture. However, I still think the material is helpful as a baseline for further investigation. [Editor's note: The Tax Policy Institute is a joint venture between the Brookings Institution and the Urban Institute; For the entire report, visit the group's website .]

Here's a table outlining what the Tax Policy Institute says could happen to the average tax bill in 2009 under each candidate:

Obama
McCain
Income
Avg. Tax Bill
Avg. Tax Bill
< $18,981
-$567
-$65
Up to $37,595
-$892
-$259
Up to $66,354
-$1,118
-$608
Up to $111,645
-$1,264
-$1,487
Up to $160,972
-$2,135
-$3,736
Up to $226,918
-$2,796
-$6,322
Up to $603,402
$942
-$15,877
Up to $2,871,682
$121,689
-$109,214
Above that ...
$699,872
-$577,148
Source: Tax Policy Institute 8/14/08; Based on information gathered from candidates' stump speeches

Of course, deciding which candidate would benefit your particular situation most depends on a lot more than simple averages.

So let's run down some of the general ideas each candidate has thrown out there so far. Please realize that I am not offering a direct head-to-head comparison, but just highlighting some key points that have caught my eye. Again, this data was culled from the Tax Policy Center ...

Capital gains and dividends: McCain wants to make permanent the 2001 and 2003 tax cuts enacted by President Bush, including the current rates on capital gains and qualified dividends. Obama would also permanently extend some of those cuts, particularly for taxpayers making less than $250,000. However, he is in favor of raising the maximum rates on capital gains and dividends for the highest earners (those in the 36% and 39.6% tax brackets, which he would reintroduce).

New tax breaks: Obama is interested in additional breaks for a host of categories including retirees, farmers, families, and students. McCain wants to up the dependent exemption by $500 a year beginning in 2010. After 2016, that exemption would be tied to inflation under McCain's plan.

Alternative Minimum Tax (AMT): While the details are complicated, McCain and Obama are both interested in extending (and increasing) a "patch" that is aimed at helping many taxpayers avoid getting snared by the AMT. Currently, that patch will expire in 2008. Without it, an estimated 26.5 million taxpayers will become subject to AMT vs. 3.5 million in 2007.

Corporate taxes: McCain would like to cut the maximum corporate tax rate from 35% to 25% over time.

Estate taxes: McCain and Obama both want to make permanent certain reductions to the estate tax, but they differ on amounts. Under McCain, the estate tax exemption would rise from its 2009 level of $3.5 million to $5 million and the tax rate would go from 45% to 15%. Obama would simply make permanent the $3.5 million exemption and the 45% rate.

Overall Tax Revenues (based on specific non-health proposals): Over the next ten years, it looks like McCain's cuts would reduce tax revenue by $3.7 trillion while Obama's cuts would shave off $2.7 trillion. These figures are according to the Tax Policy Center, and do not take into account phase-ins or sunsets.

Now, here's my real problem with both candidates when it comes to taxation: They talk a lot about simplification and overhauls — McCain has suggested an optional alternative two-rate tax system and Obama has floated the idea of simple pre-filled tax forms — but they're both basically maintaining the status quo.

I've already mentioned that the real problem is government spending. And I hope Washington eventually comes to its senses and shows some restraint. But I'm not counting on it.

So at the very least, I'd like to see our current tax system really overhauled ...

We Need Something More Than Token Changes, And There ARE Interesting Alternatives Out There!

Why are we still facing piles of paperwork ... complicated exemptions ... and confusing credits at all? Why does it take a team of forensic accountants and tax attorneys just to make sure we've properly filled out plain old 1040s?

According to some estimates, Americans shell out $265 billion every year — more than $900 for every citizen — to comply with the current tax code. That hardly sounds like an efficient system!

The good news is that there's no reason we have to accept token changes or the status quo. I see at least two other proposed tax systems out there that make a heck of a lot more sense than what we have now.

One alternative is a simple, flat income tax. Steve Forbes and Dick Armey have been two big proponents of this system.

Basically, the approach would mean we all pay a set percentage of our income to the government (17% under Forbes' plan). The only exception would be a certain initial amount of income — somewhere around $40,000 perhaps, which would allow low earners to keep enough money to cover their basic living costs before taxation.

No doubt, the flat tax proposed by Forbes is not 100% flat. Some credits and exemptions would remain, and the income exclusion would effectively mean we'd still have brackets of some sort. But proponents argue that this system would be far less susceptible to lobbying or other forms of political manipulation. And according to advocates, all it would require is a simple postcard-sized form.

Sound completely ludicrous? Well, it's worth noting that a handful of U.S. states, such as Pennsylvania, are currently using a flat tax system.

The other major alternative tax system is the idea of a national sales tax, known by its advocates as a "fair tax." Recently, the idea has been gaining steam in Washington, too.

In one of its most popular incarnations, as espoused by www.fairtax.org , U.S. citizens would pay 23% on all new goods and services for personal consumption. Used goods and business-to-business purchases would be exempted.

This national sales tax would replace federal income taxes, including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.

Wouldn't that hurt low-income consumers who spend more of their money on life's necessities? Well, proponents of the fair tax propose a monthly prebate that would ensure all U.S. citizens receive enough money to cover essential goods and services (known as poverty level expenditures).

In terms of numbers, fairtax.org estimates that a couple with two children would receive a family consumption allowance of $20,800 a year, which amounts to an annual rebate of $4,784 or $399 monthly. In other words, it would be assumed that a family of four spends $20,800 a year on necessities and should be excluded from paying a 23% tax on those goods and services.

And so that we don't end up with a national sales tax PLUS a federal income tax, FairTax advocates are seeking to repeal the 16th Amendment, which allows income taxation, should our country adopt their plan.

As with the flat tax system, some states already have this basic "fair tax" arrangement right now. My home state of Florida is a good example. I don't have to bother filling out state income tax forms at all. That's a nice change from when I lived in NY!

Does a flat tax or a national sales tax sound like an interesting alternative to what we have now? I sure think so. Are they the only solutions? Of course not. And no new tax plan will resolve the issue of overspending in Washington.

However, at the very least, I want to point out that there are other alternatives out there. Ones that are not being advertised nearly enough, and ones that may not make it into the major debates. So I encourage you to read more on the merits of each, and if you like what you see, start getting vocal no matter who ends up in office come November.

Best wishes,

Nilus

P.S. Have you checked out my blog on Money & Markets lately? If not, stop by sometime ! I regularly provide updates on the markets, as well as my thoughts on other related topics. And our comments feature lets you interact with me directly.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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