The Tax Plans of Obama and McCain
The key dividing issue is value judgments
Alfredo Ascanio (askain)*
Published 2008-10-26 09:17 (KST)
Edited by Claire George
Taxation may very well seem a blunt instrument wielded by modern governments for the sole propose of raising the enormous sums they require in order to finance their activities. However, taxation is really much more than that. It is, in its own right, a powerful instrument of economic policy.
The current presidencial candidates must bear in mind their revenue needs when designing their taxation systems and introducing new taxes or modifying the existing ones, because those decisions will affect the distribution of income within communities.
During this campaign, both Obama and McCain have submitted their tax proposals in summary form. Based on data from the Tax Policy Center, a comparison of their ideas is presented here.
New tax cuts
His income tax plan includes a refundable "Making Work Pay" tax credit of 6.2 percent on earnings up to $8,100 and a refundable Universal Mortgage Credit of 10 percent on mortgage interest for no itemizers, capped at $800 ($8,000 of interest), and would eliminate income tax for seniors making less than $50,000 per year.
He would grant first-time buyers, new farmers, small businesses and small entrepreneurs a tax credit of 20 percent on investments up to $50,000 in small-owner-operated businesses.
His corporate tax plan would allow a first-year deduction of 3- and 5-year equipment, without interest deduction. He offers to reduce maximum corporate tax rate from 35 percent to 25 percent, and increase the dependent exemption by 70 percent (phased in).
He would suspend the federal gas tax (18.4 cents per gallon from this Memorial Day until Labor Day.
Adjustments to existing credits
The tax credit on R&D and renewable energy production would become permanent.
He would extend the EITC phase-in range and increase the phase-out threshold for the childless, double the phase-in and phase-out rates for childless individuals paying child support; increase the EITC phase-in rate to 45 percent for families with three or more children, and increase the EITC phase-out threshold for married filers to $5,000. CDCTC would become refundable and low-income families would receive up to a 50 percent credit for childcare expenses. Saver's credit would be refundable and become a 50 percent match of the first $1,000 of savings, with phase-out beginning before $75,000.
He plans to increase the Hope credit 100% match rate to $4,000 for college education and make it refundable, renaming it "American Opportunity Tax Credit." Also, 401(k)s and IRAs would become automatic.
The credit on 10 percent of R&D wages would be made permanent.
Capital gains tax
Maximum capital gains rate would increase to 20 percent. This plan would demand reports on the basis for profits, eliminate capital gains taxation of start-up businesses, and provide a break for landowners selling to beginning family farmers.
He plans to keep the current rates on dividends and capital gains.
Bush tax cuts
He offers to extend permanently marriage penalty relief, adoption credit expansions, 10, 15, 25 and 28 percent rates, and EITC simplification; restore 36 and 39.6 percent statutory income tax rates, restore the PEP and Pease phase-outs for households making more than $250,000, and increase the PEP and Pease thresholds.
All provisions other than estate tax repeal would become permanent.
Alternative minimum tax
He would extend and index the 2007 AMT patch.
He would extend and index the 2007 AMT patch, and further increase exemption by 5 percent in excess of inflation after 2013 (temporarily).
Estate tax would become permanent, with an exemption for properties worth less than $3.5 million and with a maximum rate of 45 percent.
Estate tax would become permanent, with an exemption for properties worth less than $5 million and with a maximum rate of 15 percent.
Taxpayers would have the option of pre-filled tax forms to verify, sign and return to the IRS.
An alternative tax system with two rates and larger standard deductions and personal exemptions.
Revenue raisers and tax havens
Oil and gas loopholes would disappear, as would loopholes in the corporate tax deductibility of CEO payments. His plan would increase the highest bracket for capital gains and dividends, reallocate multinational tax deductions, codify economic substance doctrine and create an international watchlist of tax havens.
He would eliminate oil and gas loopholes, as well as earmarked projects from the budget, and freeze nonmilitary discretionary spending for one year.
He offers an income-related federal tax subsidy for health insurance.
He plans to replace exclusion from income for employer-sponsored health insurance with a refundable credit of $2,500 for individuals and $5,000 for families.
In social security and payroll taxes, he would impose an additional tax of 2-4 percent (combined employer and employee) on workers who make above $200,000 ($250,000 for married couples).
He would require a 3/5-majority vote in Congress to raise taxes, and ban Internet and cell phone taxes. There would be higher premiums for Medicare prescription drug coverage for single people earning more than $82,000 and couples earning more than $164,000.
Thus taxes may fall on personal or company income. It is conventional to make a distinction between direct taxation (income tax, corporate tax, levied on personal incomes or on profits) and indirect taxation (purchase tax and other selective taxes).
In order to reform a tax, the party on whom it is initially levied must be able, via changes in supply, to affect the market price of the commodity or factor being taxed. In the case of labor, which is subject to direct imposts in the form of income tax, there is less possibility of reform. This is a general tax, and wages can be affected only if they, as a share of national production, can be raised in order to offset the tax.
A fundamental point to appreciate here is that Obama has given more importance to income tax compared to McCain. Obama, unlike McCain, directs corporate tax to small business and research and development of alternative renewable energy (wind, solar).
A good tax is one which is economical to collect. This suggests, for example, that low-income earners may well be exempt from income taxes simply because their gains are small and administrative costs are heavy. Such individuals, as well as business with low returns, might present a problem for Obama's tax policy.
Another issue is payability. The fundamental question at issue concerns how the recipients of income, which is not evenly distributed, might be expected to contribute to government revenue. And there is the question on equity, or fairness of treatment.
Corporate taxation raises complex policy issues. We begin with equity, bearing in mind the distinction between distributed profits accruing to shareholders, and undistributed profits, which are ploughed back into the company. Then the company, as opposed to its shareholders, becomes the object of tax. In fact, under corporate tax, all profits, and not simply undistributed profits, are taxed at legal rates.
Economists and philosophers have debated all these points for generations and can hardly be said to have come up with a definitive conclusion. Here one is brought face to face with the borderline between economics and ethics.
*Alfredo Ascanio is a professor of economics at Simon Bolivar University in Caracas, Venezuela.