Historically, Congress is amenable to tax proposals of first-term presidents. Senator McCain proposes making permanent all of the lower individual income tax rates under EGTRRA. Senator Obama would retain the lower rates for most taxpayers, but would restore the pre-EGTRRA rates of 36 and 39.6 percent for high income taxpayers.
Elimination of the capital gains tax, which was proposed by President Bush only a few years ago, now appears remote, even if Senator McCain is elected. Mr. McCain favors retaining the present 15 percent tax on long term capital gains and qualified dividends, while Senator Obama appears to favor increasing the capital gains rate to 20 percent. Although Mr. Obama had discussed a higher capital gains rate during the primary season, given the present turmoil in the financial markets, it is unclear whether he would now seek a rate higher than 20 percent.
Neither candidate favors repeal of the estate tax. If no action is taken by Congress, the applicable exclusion amount (AEA) will return to its pre-EGTRRA levels of $1 million after 2010. The AEA is scheduled to increase to $3.5 million in 2009. Senator Obama favors retaining the $3.5 million AEA as well as the maximum estate tax marginal rate of 45 percent. Senator McCain favors increasing the AEA to $5 million, and reducing the highest marginal tax rate to 15 percent. It appears doubtful that Congress would consent to such a significant rate reduction.
Although the estate tax is scheduled to be repealed — for one year — in 2010, Congress will not likely permit that eventuality to occur. One option to increase revenues while decreasing the estate tax is to eliminate the step up in basis at death. This would result in a capital gains tax when inherited property is later sold by beneficiaries. However, this proposal has evoked zealous opposition in the past. There is no reason to expect that reaction to it would be different today. Current planning therefore assumes an exclusion amount between $3.5 and $5 million, and a marginal estate rate at or below 45 percent.
The AMT remains a perennial Achilles’ heal for Congress, which is forced to enact yearly “patches” to increase the AMT exemption amount to prevent the AMT, which is not indexed for inflation, from affecting tens of millions of taxpayers. Senator McCain has variously proposed increasing the AMT exemption amount and eliminating the AMT. Senator Obama has proposed extending the 2007 AMT patch, and indexing the AMT exemption amounts for inflation in future years.
The candidates positions differ with respect to the phase out of certain itemized deductions. Currently, certain itemized deductions are phased out for single taxpayers whose AGI exceeds $79,975, and for married couples filing jointly whose AGI exceeds $159,950. In 2008, taxpayers will lose one-third of the required phase out, a reduction from two-thirds in 2006 and 2007. Senator McCain would eliminate entirely the current phase-out of itemized deductions, while Senator Obama would restore the phase out for personal exemptions after the phase out sunsets in 2010.
Both Senators favor eliminating the so-called “marriage penalty” by making marriage penalty relief in EGTRRA permanent and making the permanent $1,000 child tax credit.
Senator Obama favors continuing the exclusion for employer provided health care benefits. Mr. Obama also favors targeted health care tax credits for lower income individuals, and health care tax credits for small business to offset the cost of providing health insurance to employees. Senator McCain favors eliminating the current exclusion, but replacing it with a refundable tax credit of $2,500 for individuals and $5,000 for families.
Senator McCain favors reducing the corporate tax rate to 25 percent from its current 35 percent, while Senator Obama would retain the 35 percent rate and increase the corporate income tax base.
Senator McCain supports an elimination of the ethanol subsidies, reducing federal tax on gas, and allowing a tax credit for zero emission cars. Senator Obama favors expanding renewable energy and conservation tax incentives, but repealing tax incentives for oil companies.
The Senate, on September 24th, voted 93-2 to approve legislation extending AMT relief at a cost of $64 billion, without offset. The bill also includes $18 billion in clean energy incentives, which would be offset by delaying deductions for domestic manufacturing activities of major oil and gas companies. The failure to offset the cost of AMT relief may slow passage in the House.