Presidential Tax Platforms
Looking through a murky crystal ball.
February 28, 2008
by Blake Christian, CPA/MBT
The 2008 presidential election has been full of surprises and American voters have been much more engaged than in any election in recent memory.
Regardless of your party affiliation or preferred candidate (at least for the moment), it is worth spending a little time familiarizing yourself with the tax platforms of the four remaining candidates.
Following is a snapshot of the tax and economic platforms of Hillary Clinton, Mike Huckabee, John McCain, and Barack Obama (listed in alphabetic order).
Senator Hillary Clinton (D-NY)
Senator Clinton has historically championed a number of causes in the Senate and in New York, including indexing minimum wage increases to raises in Congressional pay.
She has also supported tax deductions for college tuition, lobbied to eliminate the “marriage penalty” permanently, supported the extension of lower marginal rates to a larger segment of low income taxpayers and called for “refundable” child tax and adoption credits.
While generally not a champion of tax relief for large corporations, Senator Clinton has gone on record as saying the federal corporate tax rates are too high and should be lowered to allow American businesses to be more competitive on the world stage.
Clinton has also been a supporter of a variety of New York economic development initiatives, including wage credits under the Empire Zone Tax Credit Program, as well as micro-business programs and the New Jobs for New York private venture program.
With respect to larger companies, Clinton is less business-friendly. She has made it clear that she is no fan of certain tax breaks available to large corporations, including oil companies. Therefore, if elected, we can expect her to tighten or eliminate the depletion rules applicable to natural resource companies, eliminate tax deferrals on foreign operating income of U.S. companies and push the energy sector to invest in alternative energy projects or face penalties and/or higher taxes.
The Senator has also expressed frustration with the high levels of CEO salaries; therefore, more restrictive rules for deducting executive compensation under IRC Sections 162(m) (tax deductibility executive compensation limits for public companies) and 4999 (deductibility limits and excise taxes for “parachute” payments) will likely occur under a Hillary Clinton administration.
From an estate tax standpoint, Senator Clinton is a bit more forgiving to those individuals who accumulate significant wealth during their lifetimes. The Clinton tax platform will view estates with values less than $7 million as eligible for full exemption from the estate tax.
In summary, if elected, Senator Clinton will likely push for tax breaks for small businesses and lower-income employees. Senator Clinton will likely shift much of the tax relief cost for the lower-income employees and small businesses to large corporations and upper-income individual taxpayers — generally those making more than $200,000 annually — by her definition.
Former Governor Mike Huckabee (R-AR)
Former Governor Huckabee has created the biggest stir on the campaign trail as a result of announcing a controversial plan that would dismantle the IRS and replace the complex federal tax system with his “Fair Tax” plan.
Under the Fair Tax plan, all federal income and payroll taxes (personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment taxes) would be eliminated and replaced with a “consumption tax,” otherwise known as a national sales tax.
The Huckabee plan is designed to simplify the complex and time-consuming tax assessment, collection and reporting systems. Huckabee supporters estimate that up to three percent of the U.S. Gross National Product is wasted on tax compliance activities.
This plan would provide a monthly rebate or reimbursement for taxes on purchases up to the poverty line so that taxpayers aren’t taxed on basic necessities, allowing those living below the poverty line to avoid federal taxes altogether.
Taxes would be applied only to new goods, allowing tax savings by purchasing used goods. Huckabee believes the Fair Tax will promote investment, discourage American companies from moving overseas, entice foreign companies to come to the U.S. and create jobs.
The estimated federal Fair Tax rate is projected to be in excess of 20 percent of the cost of all new goods purchased in order to maintain the federal tax collections currently banked under the federal income, payroll and estate tax systems.
Critics say the Huckabee plan is fatally flawed. “To truly equal today’s federal revenue take, to be revenue-neutral, the flat tax has to be quite high — usually higher than is advertised up-front,” said Richard DeKaser, chief economist at National City Corp in Cleveland.
Analysts also see the plan as regressive — since the tax rate would be the same rate across the board, regardless of one’s income — even though the Huckabee plan does make provisions to exempt the poor.
The Huckabee camp states that the Fair Tax will instantly make American products 12 percent to 25 percent more competitive because the cost of these goods will no longer be burdened by corporate taxes, costs of tax compliance and Social Security matching payments.
When consumers buy products now, the various federal taxes are already factored into the cost. Therefore, it is argued that consumers currently pay corporate taxes, indirectly, on top of their personal tax burden.
Senator John McCain (R-AZ)
Senator McCain would seek to lower the marginal federal corporate income tax rate from the current 35 percent rate to 25 percent. A McCain administration will also attempt to require a three-fifth’s majority in Congress in order to pass any new taxes.
Alternative Minimum Tax (AMT) reform for both corporations and individuals is a critical element of McCain’s tax platform and he has expressed his clear intent to eliminate permantly the personal AMT. Specifics on corporate AMT reform is a little less clear, but relief will likely be a component of his plan.
He will push to make the Bush tax rate reductions and other benefits permanent, rather than have them expire after 2010.
McCain will also attempt to make the current Research & Development (R&D) Credit permanent, rather than leave taxpayers with the current uncertainty of whether the R&D credit will be renewed from year-to-year.
Senator McCain is lobbying for a permanent ban on any new cell phone taxes and taxes on Internet activities.
Senator McCain also supports aggressive “tax expensing” of equipment and technology equipment in order to encourage capital expenditures by businesses.
The McCain administration will seek to overhaul the Social Security system and reduce the Medicare premiums for retirees — an attractive policy for AARP members.
Senator Barack Obama (D-IL)
Senator Obama has stated that he will seek to repeal President Bush’s tax cuts for the wealthiest Americans and use that money to pay for healthcare reform. He has not stated whether he would raise other taxes to pay for expanded services.
The majority of Senator Obama’s tax platform focuses on individual tax reform, although he does provide a few corporate tax overhauls similar to Senator Clinton’s.
The freshman Senator would eliminate special interest loopholes and tax breaks and crack down on international tax havens, such as those for the oil and gas industry, as well as limiting the ability of large multi-national corporations to use tax havens to defer or eliminate U.S. income taxes on foreign income.
He will also seek to institutionalize the “economic substance” doctrine firmly to stop companies from creating abusive tax shelters.
He has proposed to increase the amount of wage income that is taxed to provide funds for additional monthly Social Security benefits. Senator Obama has stated: “I think the best way to approach this is to adjust the cap on the payroll tax so that people like myself are paying a little bit more and people who are in need are protected.” Obama's proposal will likely be structured to shield middle-income earners from paying more in payroll taxes.
Obama plans on creating a new “Making Work Pay” tax credit of up to $500 per person and up to $1,000 for America’s working families. The tax credit will be refundable to the extent it exceeds the taxpayer’s net tax liability and is projected to completely eliminate income taxes for 10 million Americans. The “Making Work Pay” tax credit will also offset some or all of a taxpayer’s self-employment tax.
His plan will also create a new universal mortgage interest credit that will benefit low and middle-income homeowners.
American seniors would see the elimination of income taxes for those making less than $50,000 per year.
With respect to estate and gift taxes, Obama has no current plans of increasing the current $2 million exemption.
The Obama plan would also dramatically simplify tax filings by “pre-populating” federal tax forms with data such as W-2 income, interest and dividend income, Social Security income and other readily available income and expense data, so that millions of Americans can complete their taxes “in less than five minutes” — a bold promise to say the least.
A Murky Crystal Ball
This is a very tough race to handicap, so cautious tax planning is recommended. Even though a candidate wins the presidency, there is no guarantee that their tax proposals as outlined during the campaign, will actually pass Congress.
However, with possible tax increases for large corporations and high income individuals under a Democratic president, acceleration of income into 2008 may be considered by certain taxpayers once the winner is decided in November (absent delays from hanging chads or other voting issues). This will make even more sense for those in an AMT position. Careful analysis of foreign operations will also be recommended.
Capital gains acceleration may make sense under certain scenarios. Installment sale structuring will take extra care since it will be difficult to predict whether any increases in capital gains rates will only have prospective application, or whether such rate increases will also apply to gain on installment note collections from sales occurring before the change in law.
These uncertain times will require you to do careful analysis before and after the election.
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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.