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Tax This; Tax That
 

When it comes to taxes, John McCain and Barack Obama both want to ease the burden and spark the economy. The difference is in how they would go about doing it. Below, we go behind the usual campaign rhetoric -- Your plan is a job killer! Yours is a giveaway to the rich! -- and dig into the specifics of each candidate's plan.
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Few Americans would pay more taxes under McCain's plan, though not everybody would see a tax cut. The plan calls for maintaining George W. Bush's tax cuts, which are due to expire at the end of 2010, including the low rates on capital gains and corporate dividends, currently capped at 15 percent. McCain would gradually increase the exemption for dependents from $3,500 to $7,000 by 2016. He also promises to fix the Alternative Minimum Tax by permanently indexing its exemption to inflation. Plus, he would cut the estate tax, exempting the first $5 million and limiting the levy on the rest to 15 percent.

McCain advocates banning taxes on online sales and opposes any new levies on cell phone calls and text messages; he also would require that any future tax increase receive a three-fifths-majority vote in Congress. And he would give Americans the opportunity to opt out of the current tax structure for what he calls a "vastly less complicated system with two tax rates and a generous standard deduction."

As for the candidate's business tax agenda, McCain would lower the top corporate income tax rate from 35 percent to 25 percent; he has also proposed, without offering specifics, measures that would expand the corporate income tax base. He has pledged to end preferential treatment for oil and gas companies and would establish a permanent research and development tax credit of 10 percent of wages spent on R&D. And for five years, businesses would be able to expense certain equipment purchases immediately. On the other hand, he would repeal the Section 199 deduction for "domestic production activities," a deduction meant to encourage businesses to keep jobs on U.S. soil. The deduction will reach 9 percent in 2010.

What the Experts Say: According to an analysis by the nonpartisan Tax Policy Center, most Americans would get a smaller tax cut under McCain's plan than they would under Obama's proposal. On average, only the top 20 percent of earners -- those with incomes of more than $112,000 in 2009 -- would do better under McCain. As for the centerpiece of McCain's business agenda, the center notes that "other countries have been lowering their corporate tax rate and broadening the base, and similar changes in the United States could be beneficial."

Budgetary Impact: The Tax Policy Center estimates that McCain's agenda would cost the Treasury $4.2 trillion over 10 years. Not so, the campaign counters, noting the significant (and largely unspecified) spending cuts McCain has promised -- he has pledged to shrink entitlement programs and eliminate congressional earmarks -- as well as the economic growth that would be sparked by lower tax rates.

Key Proposals:

  • Extend the Bush tax cuts
  • Dramatically scale back the estate tax
  • Make permanent the Economic Stimulus Act's more generous limits for expensing
  • Lower the corporate tax rate

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Obama would make the Bush tax cuts permanent for most Americans and has also proposed a variety of tax credits. Among them: a $1,000 refundable tax credit per family to offset payroll taxes; expanding the Child and Dependent Care Tax Credit to make it refundable and allow low-income earners to claim up to 50 percent of the first $6,000 of child care costs; a $4,000 refundable credit against college tuition; extending the Earned Income Tax Credit to more low-income Americans; eliminating income tax for seniors making less than $50,000; a refundable mortgage interest credit of up to 10 percent; and a fix to the Alternative Minimum Tax.

On the other hand, families with income of more than $250,000 ($200,000 for individual filers) would see the Bush tax cuts disappear. Obama also proposes raising taxes on capital gains and corporate dividends for wealthy filers from the current 15 percent to 20 percent, and he seeks to eliminate the carried interest rules that allow hedge fund managers to treat much of their income as capital gains. Obama has proposed raising the cap on Social Security taxes, although perhaps with an exemption to protect those earning from $102,000 to $250,000. He supports an estate tax with a top rate of 45 percent and a $3.5 million exemption.

For businesses, Obama is proposing incentives to invest in small businesses and tax credits for small businesses that purchase health insurance for their employees. He would eliminate capital gains taxes for investors in start-ups and small businesses (terms that remain undefined by the campaign) and permanently resurrect the R&D credit for all companies.

Obama says he will cut taxes for firms that add jobs in the U.S. But some corporations would probably face additional taxes. He would end provisions that favor the oil and gas industries (although he would reward renewable energy production) and would close loopholes that allow companies to shelter income.

What the Experts Say: According to the Tax Policy Center, on average Obama's plan would result in a tax cut for all but the richest 1 percent of Americans, and most people would probably have more after-tax income than under McCain's proposal. This includes the nearly three-quarters of taxpayers reporting small-business income who fall into the 25 percent tax bracket or lower. Only those with household incomes of more than $500,000 in 2009 are more likely than not to see a tax increase.

Budgetary Impact: The Tax Policy Center estimates that Obama's plan will cost the Treasury $2.9 trillion in lost revenue over 10 years. Obama counters that he will cut government spending, particularly for the war in Iraq. However, much of his agenda includes spending increases, and Iraq war appropriations haven't been built into the regular budget -- they are additional obligations on top of an already yawning deficit.

Key Proposals:

  • Cut taxes for all but the richest 1 percent
  • Eliminate capital gains taxes for start-ups
  • Cut taxes for firms that add jobs in the U.S.
  • Close corporate loopholes and eliminate tax shelters

Correction: The original version of this story, which appeared in the October 2008 issue, incorrectly stated that John McCain's tax plan would make permanent the limits for Section 179 expensing included in the 2008 stimulus.

For an analysis of seven other political issues that matter to entrepreneurs -- including energy, health care, and technology -- as well as related stories, blogs, polls, and a special election year quiz, go to www.inc.com/election.

Last updated: Oct 1, 2008




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