Certainty: taxes will change, whether it's Obama or McCain

McClatchy NewspapersJuly 24, 2008 

WASHINGTON — Regardless of who wins the White House in an election where everyone talks about change, there's one change America can count on: taxes.

The fact that President Bush and Congress enacted temporary tax cuts in 2001 and 2003 that expire at the end of 2010 means it's inevitable that taxes will change, perhaps dramatically.

The next president and Congress will agree to extend some or all of those tax cuts while also cutting or raising other taxes — or else political gridlock will stymie agreement, the tax cuts will expire, and tax bills will go up for almost everyone.

"It is a unique moment," said Robert Reischauer, a former director of the Congressional Budget Office. "Something has to happen."

But what? Who will pay less and who will pay more? Which plan will get through a Congress all but certain to remain in Democratic control?

The likeliest ideas to make it through are those few changes that Democrat Barack Obama and Republican John McCain both want.

They both want to extend the Bush tax cuts for those making less than $250,000 — mainly the $1,000 per child tax credit, lower income tax rates and elimination of the marriage penalty.

"There's a good chance that whoever the next president is, the Congress will agree to extend the middle class tax cuts," said Leonard Burman, director of the Tax Policy Center, a joint operation of the Urban Institute and Brookings Institution that analyzes taxes. Both are center-left think tanks.

"The candidates want it and majorities in both houses of Congress favor it," Burman said.

Beyond that, however, Obama and McCain differ greatly.

Obama's goal is to make the tax system more progressive, Burman said, letting the working poor and middle class pay less and making the wealthy pay more. His goal, however, could be compromised if he raises tax rates on the wealthy so much that he drives them to hide income and they essentially end up paying less taxes, not more.

At the bottom of the economic ladder, Obama would actually give money to the working poor by making more tax credits "refundable," meaning they would get a check for any tax credit left over after the income tax bill had been covered.

A new "Making Work Pay" tax credit, for example, would give a credit or check for up to $1,000 to a couple making $16,200 a year.

For middle-income earners, Obama proposes new tax cuts including an increased credit for college costs, expanding the Earned Income Tax Credit to more families, and eliminating income taxes for senior citizens making less than $50,000 a year. He also would extend the Bush tax cuts for single taxpayers making less than $200,000 and couples earning less than $250,000.

At the top, Obama wants to let the Bush tax cuts expire as planned for singles making more than $200,000 a year and couples earning over $250,000. He also would make them pay additional taxes for Social Security.

In some high tax areas such as New York, these changes could push the total tax burden beyond 50 percent, Burman said. That would be the highest since the late 1970s and could drive the wealthy to more aggressively hide income from taxes.

But a President Obama might not get his way even with a Democratic Congress.

Obama wouldn't need to do anything to raise income tax rates on the top earners. That would happen automatically at the end of 2010.

But he would need to get Congress to approve if wanted to enact the tax increases in 2009, and might have a hard time getting the 60 votes likely needed in the Senate.

"There will be resistance to tax increases," said Burman.

One unforeseen problem: a lot of capital gains taxes are paid by investors in wealthy, big-city neighborhoods represented by Democrats, according to Michael Franc, a congressional scholar at the Heritage Foundation, a right-of-center think tank.

"An overwhelmingly large percentage of those dollars come from blue districts in blue states," Franc said.

He said that wouldn't change the thinking of many more liberal Democratic members such as Reps. Jerrold Nadler of New York, Nancy Pelosi of San Francisco or Henry Waxman of Los Angeles.

But it could cause others such as Reps. John Lewis of Georgia or Dennis Moore of Kansas to oppose the capital gains increase. "If there's an enclave of wealth in Kansas, it's in Moore's district," Franc said.

McCain's goal is to spur economic growth, Burman said. His hopes also could be compromised, however, if the benefits of tax cuts are offset by the drag of higher interest rates lifted by rising federal budget deficits, he said.

McCain's plan would extend all of the Bush tax cuts, including those for people making more than $250,000. He also would cut the top corporate tax rate from 35 percent to 25 percent.

His top challenge would be getting a Democratic Congress to agree to extend the tax cuts for those making more than $250,000.

"That would be one of the hardest things for him to accomplish," said Franc. "The hard part is that the default of gridlock is higher taxes for everybody. If he uses a veto strategy (threatening to veto any tax plan that doesn't include tax cuts for the wealthy), all the tax cuts go away. He'd be at an inherent disadvantage negotiating with Congress."

For the Tax Policy Center analysis of the two tax proposals, http://www.taxpolicycenter.org/publications/url.cfm?ID=411741

For more from the Heritage Foundation, http://www.heritage.org/

For more from the Obama campaign,

http://www.barackobama.com/issues/fiscal/

For more from the McCain campaign,

http://www.johnmccain.com/Issues/JobsforAmerica/taxes.htm

For tax information from other parties: http://www.bobbarr2008.com/issues/taxesv/, http://www.votenader.org/issues/fiscal/fair-tax/

McClatchy Newspapers 2008

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