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Blake Christian
Blake Christian

Presidential Tax Platforms

New and improved?

October 27, 2008
by Blake Christian, CPA/MBT

The Presidential election is right around the corner and the new proposals from Senators John McCain (R-Ariz) and Barack Obama (D-IL) are coming as fast as the bail-out proposals from Treasury Secretary Henry Paulson. Obviously the ongoing worldwide credit crisis and the resulting stock market unprecedented volatility have forced the candidates to alter their prior economic proposals.

With voters focused on the faltering economy, hard-dollar losses in their retirement and other investment accounts as well as general pessimism regarding the world financial outlook, a critical factor in choosing our next president hinges on voter perception of the candidates’ abilities to effectively resurrect the U.S. economy.

Earlier this month, just prior to their third and final debate, Senators McCain and Obama released details of the updated versions of their proposed tax platforms. Summarized below are the main points of each candidate’s latest proposals.

Obama
McCain
Obama
McCain

Corporate Changes

Corporate Changes
  • Retain corporate tax rate of 35% and broaden the tax base.
  • Gradually cut the corporate tax rate from 35% to 25%.
  • Make the R&D tax credit permanent.
  • Convert R&D credit to 10% of wages incurred for research and development, make R & D credit permanent.
  • Tax publicly-traded partnerships as corporations.
  • Eliminate the IRC Section 199 Domestic Production Activities Deduction.
  • Impose a windfall profits tax on oil & gas companies.
  • Eliminate oil and gas loopholes.
  • Eliminate oil and gas loopholes.
  • First-year deduction of the full cost of three- and five-year business equipment purchased and placed in service between 2009 and 2013. Eliminate the interest deduction for expensed equipment.
  • Limit CEO pay and other perceived loopholes.
  • Ban Internet taxes. Permanent ban on taxes that threaten the Internet’s economic growth and prosperity.
  • Codify “economic substance” doctrine with bright-line tests to qualify for deductions.
  • Employee income inclusion for company-paid medical insurance. See “Personal Changes” for more details.
  • Create an international “watch list” to require additional disclosure and scrutiny for possible tax shelter transactions/ operations.
  • Ban new cell phone taxes.
  • Healthcare Tax Credits for small businesses. Plans to expand pooling options and eases enrollment for health insurance. Paid for via increased Social Security tax of 2% to 4% percent (split between employers and employees).
  
  • Provide a refundable $3,000 per employee credit for firms that increase hiring.
  

Personal Changes

Personal Changes
  • The top two individual income tax brackets return to 36% and 39.6% (from current 35%). Restore 1990’s levels for personal exemption and itemized deduction phase-outs.
  • Keep the top individual tax rate at 35%. Make permanent the phase-out of the limitation on itemized deductions.
  • Increase maximum capital gains rate to 20% for those earning more than $200,000 ($250,000 for married couples).
  • Retain the current 0% (for low-income taxpayers) and 15% long-term capital gain rates.
  • Eliminate capital gains taxes for entrepreneurs and investors in small business.
  • Maximum long-term capital gain rate would decrease to 7.5% for 2008 and 2009 then remain at 15% thereafter.
  • Re-characterize current capital income associated with “carried interests” as ordinary income.
  • Increase the amount of capital loss deduction from $3,000 to $15,000.
  • Top dividends rate of 20% when income is over $250,000.
  • Reduce tax rate to 10% on the first $50K seniors withdraw from retirement plans in 2009 and 2010.
  • Eliminate income taxes for seniors making less than $50,000.
  • Increase AMT exemptions and allow non-refundable personal credits to offset AMT.
  • Allow penalty-free (but still taxable) withdrawals from retirement plans.
  • Increase dependent exemption by $500 beginning in 2010 until it reaches $7,000 in 2016.
  • Extend the current AMT patch and index exemption amounts for inflation.
  • Exempt the unemployment insurance benefits from tax in 2008 and 2009 for taxpayers making less than $100,000.
  • Expand the Earned Income Tax Credit. Increase eligibility and benefits, reduce the marriage penalty.
  • Refundable tax credit towards health insurance of $2,500 ($5,000 for couples). Treat employer provided health care benefits as taxable.
  • Suspend tax on unemployment benefits.
  
  • Make child/dependent care credit refundable, increase amount to up to 50% of qualifying expenses.
  
  • Expand tax credits for clean vehicles up to a $7,000 tax credit for the purchase of advanced technology vehicles.
  
  • Refundable $4,000 American Opportunity tax credit for qualified tuition expenses (to replace Hope credit).
  
  • Refundable “Making Work Pay Credit” of 6.2% of earnings up to a maximum earnings of $8,100 per worker.
  
  • Existing refundable Savers Credit expanded to match 50% of the first $1,000 of savings for families that earn under $75,000.
  
  • 10% mortgage interest tax credit for non-itemizers capped at $800.
  
  • Mandate 401(k) and IRA plan participation.
  

Estate Tax Changes

Estate Tax Changes
  • Estate tax rate of 45%, estate tax exemption of $3.5 million per individual.
  • Reduce estate tax to 15% with $10 million exemption.

One of the most hotly-debated issues surrounding the candidates’ tax platforms is how the overall tax burden under their respective administrations should be spread among the middle and high-income taxpayers.

Senator McCain believes that upper-income taxpayers are already paying their fair share of the federal tax burden and wishes to retain the current tax rates in effect at all income levels.

Senator Obama, however, believes that the current rates on individual and business taxpayers “making more than $250,000” are too low and an increase in rates is appropriate in order to fund lower rates and refundable credits for middle-income and low-income taxpayers.

Senator Obama’s threshold for defining the richest taxpayers is apparently tied to taxable income versus gross income and decreases to $200,000 for single taxpayers.

The complication in analyzing the impact of these tax rate proposals revolves around the high number of small businesses that operate as pass-through entities. Small-businesses operating as an S Corp, Partnership or LLC (limited liability partnership) will flow-though their income to the equity owners and income and taxes will be paid at the equity owner level, rather than the entity level. This has the effect of magnifying an individual’s personal AGI (adjusted gross income) and taxable income. Therefore a relatively large number of taxpayers will hit this $250,000 threshold, absent factoring in some concession for this common fact pattern.

The latest IRS statistics for calendar 2006 tax filings show that the top five percent of individual taxpayers (who include S Corp and Partnership/LLC owners) filed approximately 6,785,000 returns out of the 135,700,000 total returns that show positive Adjusted Gross Income. These returns reflect 36.66 percent of the total U.S. reportable personal income (AGI), yet these individuals shouldered 60.14 percent of the total individual tax burden. The average AGI for this group was in excess of $438,000 for calendar 2006, which puts the vast majority in the highest tax brackets — now and under either Administration.

The top 25 percent of individual taxpayers paid 86.27 percent of the total 2006 individual tax burden.

Obviously under either candidate’s administration we will likely see significant changes in the corporate and individual tax landscape. However, with the current economic challenges, it is difficult to predict Congress’s future appetite for tax increases or decreases and the full magnitude of these proposed changes.

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Blake Christian, CPA/MBT, is a Tax Partner in the Long Beach Office of Holthouse Carlin & Van Trigt LLP and is Co-Founder of National Tax Credit Group, LLC.