You might not be aware, but there is a pretty contested race for President of the United States going on right now. On the one hand, we have the incumbent from Kenya, and on the other, the absurdly wealthy businessman from Mexico. How can we possibly choose between two non-Americans? Pick the one with mad basketball skills or the one with an incredibly coiffed head of hair? It’s too much for me; I’ve decided to move to Canada.
In all seriousness, many voters have become disenfranchised, figuratively for sure, with the course of politics in the last few years. And it doesn’t help when the candidates seem to pander to their base and forget about the millions in the middle who want real solutions to real problems. For these Americans, it’s not choosing the best candidate to represent them, but rather the least worst candidate who won’t embarrass them. So, how do they decide who to vote for?
As this is a tax blog, we propose that we look to the candidates’ tax plans and analyze who will really prosper from each proposal. How will Mitt and Barry raise enough revenue to reduce the deficit while stimulating economic growth?
In this installment, we will provide an overview of the candidates’ plans, and in the three weeks leading up to the election, we will delve further into some of the more controversial policies.
Governor Romney’s tax plan will simplify the tax code and reduce the tax burden on the middle class by reducing marginal rates by 20% across the board and limiting tax preferences. His theory, at its essence, is that lower taxes, especially for small businesses, stimulate entrepreneurship, job creation, and investment, all of which will lead the country to prosperity.
The current code, Romney argues, is too complicated and too narrow in its base. Instead, he proposes to broaden, or “clean up,” the tax base, by eliminating certain tax preferences (i.e. credits, deductions), thus making more income subject to tax. Romney, however, has not laid out exactly what tax preferences he would eliminate in order to clean up the tax base. Presumably, he would allow certain tax preferences that were enacted as part of the 2009 stimulus act to expire, including the American Opportunity Tax Credit, as well as the expansions of the Earned Income Tax Credit and the child credit.
Furthermore, Romney’s plan will permanently extend the Bush-era tax cuts on returns from saving (i.e. interest, dividends, and capital gains) for individual taxpayers with an adjusted gross income over $200,000 per year; for taxpayers who make less than that, he will completely eliminate taxes on returns from saving. Romney also proposes eliminating the estate tax, repealing the alternative minimum tax, and rescinding the taxes enacted as a part of Obamacare.
With respect to corporations, Romney intends to reduce the corporate tax rate from 35% to 25% and make permanent the Research and Development Tax Credit. Furthermore, in an effort to increase the competitiveness of domestic business, Romney proposes switching to a territorial system of collecting taxes. This means that the US could impose taxes only on income that is sourced from within the US, as opposed to taxing all income that arises from US sources, disregarding where that income arose, as does our current world-wide tax system.
President Obama similarly champions middle class tax relief. He proposes to maintain the Bush-era rate cuts for taxpayers who make less than $250,000 per year, while raising the marginal tax rate for those taxpayers who make more than $250,000 per year, thus returning rates to the Clinton-era maximum marginal rate of 39.6% for those taxpayers.
Like Romney, Obama also sees the benefit of reducing the tax on returns to saving, and he thus proposes to tax long-term capital gains at a 20% rate as opposed to ordinary income rates. However, he would tax qualified dividends at the ordinary rates.
In addition, Obama proposes extending certain tax preferences such as the American Opportunity Tax Credit and Earned Income Tax Credit, and expand the child and dependent care tax credit. He would also restore the estate tax.
With respect to corporations, Obama proposes to provide incentives to businesses who expand their manufacturing and insource jobs in the US. He would provide other incentives to small businesses such additional credits to small businesses who hire veterans.
No summary of tax proposals could be complete without a mention of Vice Presidential Candidate Paul Ryan’s proposed plan. In his proposal entitled “A Roadmap for America’s Future Act of 2010,” Ryan advocated broadening the tax base, like Romney, but eliminating all current deductions and credits, exempting from tax all returns on saving, and taxing flow-through businesses (i.e. partnerships, sole proprietorships, etc.) only to the extent that their adjusted gross income represents wages (anything above that would be considered dividend). He would repeal the exclusion for employer provided health insurance and instead offer a refundable tax credit to individual taxpayers. Finally, he proposed entirely replacing the corporate tax system with a “business consumption tax,” similar to a VAT (value-added tax), on all businesses no matter what form they are organized. The businesses could immediately expense all investment, but nothing else.
Stay tuned for our next few posts discussing various items in these proposals in greater depth.
Nothing posted on The Hotchpot constituted legal or tax advice, and no information on The Hotchpot should be relied on as such. Please review our Disclaimer here.
 Thanks, JetBlue, for the free flight!
 Unless otherwise noted, all information has come from the candidates’ web sites, presidential debates, and the Tax Policy Center website.
 I note that, in the second presidential debate, Romney referenced a “bucket of deductions” policy, whereby each individual taxpayer would be allowed to take up to $25,000 of deductions or credits, and they could pick and choose which preferences they would like to take. This “bucket” idea has not been fully fleshed out.