by Roger Russell
The presidential candidates’ tax plans are generating more discussion than usual, even for such a hotly contested election, with President George W. Bush and Senator John Kerry both proposing different approaches.
President Bush’s recent off-the-cuff musings about a national sales tax were immediately slammed by Kerry as amounting to “one of the largest tax increases on the middle class in American history,” causing administration officials to deny that any consideration of such a tax was underway.
Meanwhile, the White House links the recovering economy with the tax cuts of the past two years, often pointing to 11 straight months of job gains. The Kerry camp, citing the endorsement of 10 Nobel Prize-winning economists, attacked the tax cuts as “poorly designed” and leading to lower-paying jobs that are more likely to be temporary and less likely to offer health insurance.
In some respects, Kerry’s plan is similar to current administration tax policy. He would extend Bush’s individual tax cuts, which are scheduled to expire at the end of 2010, except for families with incomes of more than $200,000.
Proceeds from repealing the tax cut would go toward a proposed college opportunity tax credit that would be refundable and available for the first $4,000 in tuition and fees in each of the four years of college. In addition, Kerry proposes a refundable tax credit for up to 50 percent of coverage of health insurance premiums provided by small employers.
“High-income earners, under Senator Kerry’s tax plan, would carry the burden of funding his legislative priorities,” said Clint Stretch, Deloitte & Touche’s director of tax policy.
An analysis by D&T illustrated the effects of the Kerry plan on a range of families and single taxpayers. Low-and middle-income taxpayers would continue to enjoy the tax cuts that they already received, explained Stretch.
For example, a family of four with wage income of $40,000 would lose nothing under the Kerry plan. They have an annual savings of about $2,000 under the current Bush tax plan. Compare this family with one that has both wage and investment income totaling $265,000: Although the wealthier family now receives about $7,200 in annual savings from the Bush tax cuts, it would lose over $5,300 of the relief if the Kerry tax plan were effective for all of 2004.
That’s a decrease of more than 73 percent of the relief it now gets, according to Stretch.
The difference stems from a combination of factors, including the loss of favorable income tax rates for investment income and a larger alternative minimum tax liability, assuming that the AMT exemption increases under the Bush tax plan are scaled back.
High-income taxpayers who earn significant investment income would experience the greatest jump in tax rates, according to the Deloitte analysis. “Last year’s capital gain and dividend tax cuts have brought tremendous savings to investors,” said Stretch. A high-income couple with substantial investment income could expect to lose thousands of dollars in tax savings under the Kerry plan, with the marginal income tax rate on dividends for such individuals bouncing from 15 percent to 39.6 percent.
Although President Bush has twice signed legislation reducing individual income tax rates on income in all tax brackets over the past four years, the cuts at this point are temporary, noted Stretch.
“Even under current law, taxpayers can expect future tax increases — without any changes to the law,” he said. “So if Congress fails to intervene before the cuts sunset, everyone can expect a larger tax bill in the future, regardless of what any Democratic candidate may do.”
Under Kerry’s plan, the corporate tax rate would be reduced by 5 percent (from 35 percent to 33.25 percent). This would be paid for by ending the practice of allowing corporations with foreign-sourced income to defer paying the U.S. profits tax on that income, a proposal that Kerry said would “close tax loopholes on companies that ship jobs overseas.”
The U.S. Chamber of Commerce opposes the “loophole closing” aspect, maintaining that raising taxes on U.S. companies that do business abroad will only make them less competitive, less profitable and less likely to create new jobs at home or abroad. “The Kerry plan will no longer allow U.S. companies to shift their headquarters along with U.S. profits and jobs to low-tax jurisdictions,” said Selva Ozelli, CPA, an international tax attorney with RIA, a Thomson business.
“It will prevent U.S. firms from deferring U.S. taxes owed on their foreign earnings from overseas subsidiaries under Subpart F, except in the case where a U.S. multinational’s foreign subsidiary provides goods and services to markets in that same country in which the subsidiary is located,” she explained. “It will also allow a one-year tax holiday for repatriation of foreign profits never taxed by the U.S. at a one-time rate of 10 percent. This is intended to increase domestic capital formation and lead to the creation of new U.S. jobs.”
The Subpart F provisions of the administration’s 2004 Jobs Act are the opposite of Kerry’s Subpart F plan proposal, noted Ozelli. “The Jobs Act would expand the Subpart F foreign income deferment rules, thus allowing U.S. multinationals to defer U.S. taxation on foreign-earned income,” she said.
