As taxes take center stage in this years presidential election, we thought it might be beneficial to look at the general differences between the two candidates.
President Obama’s plan.
The details of President Obama’s tax plan have been garnered largely from his 2013 budget, his “Framework for Business Tax Reform” and legislative proposals.
- Individual rates. President Obama would retain the current 10%, 15%, 25%, and 28% rates, and would raise the top two rates for “higher income” taxpayers (generally, those making over $250,000 for marrieds filing jointly, and over $200,000 for single taxpayers) to 36% and 39.6%.
- Deductions and credits. President Obama would eliminate “tax subsidies for millionaires that they do not need,” and reduce the value of itemized deductions and other tax preferences to 28% for taxpayers subject to the 36% and 39.6% rates.
- Investment income. President Obama would raise the long-term capital gain rate to 20% for higher income taxpayers and keep the 15% maximum rate for others. Dividends would be taxed as ordinary income for higher income taxpayers (i.e., at the 36% and 39.6% rates), and other taxpayers would continue to be taxed at the 15% maximum that currently applies. President Obama would also tax carried interests (i.e., the share of profits that executives receive from certain types of firms as part of their compensation that is currently taxed at 15%) as ordinary income.
- Alternative minimum tax. President Obama would, using the 2011 parameters from the 2010 Tax Relief Act, index the individual alternative minimum tax to inflation. President Obama has also endorsed the so-called “Buffett Rule,” under which households making more than $1 million a year would pay at least 30% of their income in taxes.
- Estate tax. President Obama would restore the estate tax exemption and rate to 2009 levels ($3.5 million exemption, 45% rate).
- Corporate rates. President Obama would reduce the top corporate tax rate from 35% to 28%.
- International tax. President Obama would subject income earned by subsidiaries of U.S. corporations operating abroad to an unspecified minimum rate of tax, create a 20% income tax credit for the expenses of moving business operations back to the U.S. and disallow deductions for moving business operations abroad, and currently tax the excess profits associated with shifting intangibles to low-tax jurisdictions.
- Other proposals. President Obama would also eliminate certain industry-specific tax breaks such as those for the oil and gas industry, extend the Payroll Tax Cut through 2012 (which reduced the employee OASDI tax rate under the FICA from 6.2% to 4.2%, and under the SECA for the self-employed from 12.4% to 10.4%, up to the applicable wage base), overhaul the current research tax credit, and renew clean energy tax incentives.
Governor Romney’s plan.
The details of Governor Romney’s tax plan have been compiled primarily from his campaign materials. At this time, it is hard to tell which of these proposals are campaign promises and which are viable tax policies. It is also important to note that there are a number of significant differences between Governor Romney’s and his running mate’s, Rep. Paul Ryan, tax plans. The extent to which these two might be reconciled is still unknown.
- Individual rates. Governor Romney would reduce all current tax rates by 20%, resulting in six rates of 8%, 12%, 20%, 22.4%, 26.4%, and 28%.
- Deductions and credits. Governor Romney has stated that his tax plan would be revenue-neutral, and that his tax cuts would be paid for by broadening the tax base (i.e., reducing or eliminating current deductions, etc.). However, he has not yet specified what those tax breaks are. The Tax Policy Center (TPC) has recently released a high-profile study questioning whether revenue-neutral, base-broadening reform could realistically be obtained.
- Investment income. Governor Romney wouldn’t impose any tax on investment income for individuals with adjusted gross income (AGI) of less than $200,000, and would tax interest, dividends, and capital gains at 15% for individuals making $200,000 or more. He would also repeal the 3.8% investment income tax scheduled to take effect in 2013.
- Alternative minimum tax. Governor Romney would repeal the AMT.
- Estate tax. Governor Romney would repeal the estate tax.
- Corporate rates. Governor Romney would enact a 25% corporate tax rate.
- International tax. Governor Romney would shift to a territorial tax system.
- Other proposals. Governor Romney would repeal the President’s landmark health care legislation and “strengthen and make permanent” the research tax credit.
Rep. Ryan’s plan.
The details of Rep. Ryan’s tax plan are largely from his Chairman’s Mark, which proposed a new budget for fiscal year 2013 and set out appropriate budgetary levels for later years. The extent to which these are incorporated into Governor Romney’s tax plan is still unknown. The Romney campaign has already made efforts to distance itself from Rep. Ryan’s budget proposal, which is regarded by many as extreme.
- Individual rates. Rep. Ryan would consolidate the existing tax rates into two rates of 10% (for up to $50,000 for single filers and $100,000 for joint filers) and 25% on income above these amounts.
- Deductions and credits. Rep. Ryan would get rid of most tax deductions, credits, and exclusions, and would increase the standard deduction and personal exemption amounts.
- Investment income. Rep. Ryan wouldn’t impose any tax on investment earnings.
- Alternative minimum tax. Rep. Ryan would repeal the AMT.
- Estate tax. Rep. Ryan would repeal the estate tax.
- Corporate rates. Rep. Ryan would reduce the corporate income tax to 25%. Earlier versions of Rep. Ryan’s plan called for eliminating the corporate tax and replacing it with a 8.5% consumption tax.
- International tax. Rep. Ryan would shift from a worldwide tax system to a territorial regime.
- Other proposals. Rep. Ryan would also drastically reform Medicare and Medicaid and repeal the President’s landmark health care legislation.
Regardless of which candidate wins, it is certain that tax policy and reform is a key issue. This election will shape our economic and tax landscape for most of the next decade.
We will continue to keep you up to date on developments in this area. If you have any questions regarding these policies and their potential impact on your specific situation or strategies, please do not hesitate to contact us.