Your Money’s Guide to the 2008 Presidential Elections–Taxes

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The next U.S. President will make many decisions with major consequences to your pocket book. From taxes to health care, social security to immigration, and education to retirement, Your Money’s Guide to the 2008 Presidential Elections will describe each candidate’s position on these issues, with ample links to further reading. The focus of this site is smarter money management, and making an informed choice this November will likely be one of the most important money management decisions we ever make. You can subscribe to The Dough Roller via RSS feed or email so that you don’t miss a single issue.

Overview of Presidential Candidates’ Tax Policies

The tax policies of Senators Obama, Clinton and McCain fall along party lines. Both Senators Obama and Clinton would raise taxes substantially on those making more than about $100,000 per year, and particularly on those making more than about $250,000. At the same time, Senators Obama and Clinton have proposed various tax cuts for those making a middle or lower class wage.

In contrast, Senator McCain’s tax policy would not raise taxes. He has proposed various tax cuts, some of which would benefit those making less than $100,000 per year, and some benefiting those making more. In addition, Senator McCain would make it harder for Congress to raise taxes by requiring a 3/5 vote to do so.

As you evaluate the candidates’ tax policies described in more detail below, you may wish to consider the following:

• As of April 24, 2008, the U.S. national debt stood at $9,333,202,141,247.10 (Source: Treasury Direct).
• The top 20% of wage earnings currently earn 61% of the income and pay 73% of the income tax. The next 20% of wage earners pay 17% of the income tax.

Click on image to see supporting data
• By 2080, the cost of Social Security, Medicare and Medicaid will equal nearly 22% of gross domestic product (it’s currently about 8%).
• Under current projections, Medicare spending will exceed revenues from its dedicated tax by 2010, and its trust fund will be exhausted by 2018.
• Social Security will reach the same landmarks in 2017 and 2040, respectively.

It’s an understatement to say that the next President of the United States and the Congress will have some very difficult decisions to make. One of those decisions will be whether to continue with President Bush’s tax cuts, or to repeal them in whole or in part. For this reason, we’ll briefly look at President Bush’s tax cuts, and then turn to the candidates’ proposals.

President Bush’s Tax Cuts

Here are several key facts about President Bush’s tax policy and cuts since 2001:

• Congress has cut taxes every year since 2001. The most significant tax cuts came from the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
• Tax cuts since 2001 have reduced most individual tax rates including those on capital gains and dividends, expanded the child tax credit, phased out the limitations on itemized deductions and personal exemptions for high-income taxpayers, and phased out the estate tax. Virtually all of the cuts end by 2011.
• The tax cuts will reduce government revenue by approximately $2 trillion over the 2001–2010 period.
• President Bush’s tax cuts, on a percentage basis, benefited high-income earners the most, as indicated in the following table:

Source: Tax Policy Center

This last point has been the source of much of the debate surrounding President Bush’s tax cuts. Some view this as evidence that President Bush’s tax cuts favors the wealthy at the expense of the working class. Others note that the wealthy pay the vast majority of income taxes, and an across the board tax cut that benefits everybody in proportion to the amount of taxes they pay is fair and equitable.

2008 Presidential Candidates’ Tax Proposals

President Bush’s Tax Cuts

Senator Obama

He would repeal President Bush’s tax cuts for the top two income tax brackets. This proposal would change the top two brackets of 33% and 35% to 36% and 39.6%. Based on the 2007 tax brackets, these changes would increase taxes for single filers making more than $160,000 and joint filers making more than $195,000.

Senator Obama also would increase taxes on dividends and capital gains. In speeches, Senator Obama has expressed his concern that the government taxes income from work more than it does income from investments. He would change this by returning to the Clinton-era tax rates for dividends and capital gains.

Finally, Senator Obama would freeze estate tax at 2009 levels and extend the cut after 2011.

Senator Clinton

She would also repeal President Bush’s tax cuts for the top two income tax brackets. Senator Clinton also would repeal the PEP and Pease phaseouts for households making more than $250,000. The PEP (”personal exemption phase-out”) provision prevents high-income earners from claiming a personal exemption ($3,200 in 2005) for each member of their household, and the Pease (named after former Rep. Don Pease (D-OH)) provision limits the value of itemized deductions for taxpayers with high incomes. Senator Clinton also would freeze estate tax at 2009 levels and extend the cut after 2011.

Senator McCain

He would make permanent the Bush tax cuts on both income and investments.

New Tax Cuts

Each candidate has proposed various new tax cuts. Senators Obama and Clinton’s tax cuts focus on the middle and lower class wage earners. Senator Mccain’s tax cuts focus on all levels of income earners.

Senator Obama

1. Making Work Pay tax credit: A refundable tax credit of up to $500 per person, or $1,000 per family. Senator Obama estimates that this will benefit 150 million workers and that for 10 million Americans, it will completely eliminate income taxes. Senator Obama has not indicated what income limits will qualify an individual or family for the “Making Work Pay” tax credit, but it’s clearly intended for the middle and lower class wage earners.
2. Expand the Child and Dependent Care Tax Credit: This credit currently covers up to 35 percent of the first $3,000 of child care expenses a family incurs for one child and the first $6,000 for a family with two or more children. Senator Obama proposes to make the tax credit refundable and allow low-income families to receive up to a 50 percent credit for their child care expenses.
3. Eliminate Income Taxes for Seniors Making Less Than $50,000: Senator Obama proposes to eliminate all income taxation of seniors making less than $50,000 per year.
4. Expand the Earned Income Tax Credit: Senator Obama would increase the number of working parents eligible for EITC benefits, increase the benefit available to parents who support their children through child support payments, and reduce the EITC marriage penalty. Full-time workers making minimum wage would get an EITC benefit up to $555, and those supporting children would get a benefit of $1,110.
5. Universal Mortgage Credit: This 10 percent credit will provide the average recipient with approximately $500 per year in tax savings, according to Senator Obama. It will a refundable credit for those who do not itemize their deductions.
6. American Opportunity Tax Credit: This universal and refundable credit will pay for the first $4,000 of college tuition for most Americans. It is unclear exactly who would be eligible for this tax credit.
7. Expand the existing Savers Credit: Senator Obama proposes to match 50 percent of the first $1,000 of savings for families that earn under $75,000 and to make the tax credit refundable. The savings match will be automatically deposited into designated personal accounts by using the account information listed on IRS tax filings.

Senator Clinton:

1. Health Care Tax Credit: As part of Senator Clinton’s health care proposal, she wold create an income-related refundable tax credit for health insurance, new health care tax credit for small businesses to insure employees, and new tax credit for qualifying private and public retiree plans under health plan
2. American Retirement Accounts Plan: Under the plan, individuals could contribute up to $5,000 per year on a tax deferred basis, and the first $1000 contributed into the accounts would be matched by the government on a 50%or 100% basis, depending on eligibility.
3. College tax credit: Senator Clinton would implement a $3,500 partially refundable college tax credit.
4. Reform AMT: Senator Clinton has said she would reform AMT “to ensure people don’t face stealth tax increases.”

Senator McCain:

1. Repeal AMT: Senator McCain would permanently repeal the Alternative Minimum Tax.
2. Raise personal exemption: He proposes to raise the personal exemption for each dependent from $3,500 to $7,000.
3. Reduce corporate tax rate: Senator McCain would reduce the federal corporate tax rate from 35% to 25%.
4. Ban Internet Taxes: Senator McCain would seek a permanent ban on taxes on the Internet.
5. Ban New Cell Phone Taxes: He also would seek to prohibit new cellular telephone taxes.

New Tax Increases

Apart from Senator Clinton and Obama’s proposal to repeal President Bush’s tax cuts, the most significant tax increase proposal comes from Senator Obama. Specifically, he proposes to raise the social security payroll tax. Currently, the Social Security payroll tax applies to the first $102,000 a worker makes. Senator Obama would raise this limit, although he has not indicated by how much.

Additional Reading

Here are some additional sources if you’d like to explore further the presidential candidates’ tax policies:

• Tax Foundation’s comparison chart of the candidate’s tax proposals.
• Tax Policy Center’s comparison chart of the candidate’s tax proposals.
• CNN Money’s analysis of the candidates’ tax proposals.

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