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TAX POLICY Election 2008: Issues Forum & Voter’s Rights Penn State University October 31, 2008

TAX POLICY Election 2008: Issues Forum & Voter’s Rights Penn State University October 31, 2008. Samuel C. Thompson, Jr. Professor and Director, Center for the Study of M&A Penn State Dickinson School of Law University Park, PA.

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TAX POLICY Election 2008: Issues Forum & Voter’s Rights Penn State University October 31, 2008

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  1. TAX POLICYElection 2008: Issues Forum & Voter’s RightsPenn State UniversityOctober 31, 2008 Samuel C. Thompson, Jr. Professor and Director, Center for the Study of M&A Penn State Dickinson School of Law University Park, PA (c) S. C. Thompson, Jr, 09.04.08

  2. This presentation compares the tax policies of Senator John McCain (JM) with those of Senator Obama (BO). Although I am an Obama supporter, I have made every effort to make this presentation as accurate and non-partisan as possible. (c) S. C. Thompson, Jr, 09.04.08

  3. Tax Rates for Those Making More Than $250K – I Will Return to This at the End with Some Observations about “Joe the Plumber” • JM • He will continue the Bush Tax Cuts which reduced the tax rates on taxpayers making more than $250K from 36% and 39.6% to 35%. The maximum 39.6% rate applied during the 1990s. • JM says raising taxes on the rich will hurt small business • However, Sullivan finds that only 20% of taxpayers above $250K in income are small businesses (c) S. C. Thompson, Jr, 09.04.08

  4. Tax Rates for Those Making More Than $250K (Cont’d) • BO • Reinstates the 36% and 39.6% rates on taxpayers making more than $250K, thus returning to the rates that applied in the 1990s, • These higher rates are marginal rates, that is, the higher rates only apply to income above a certain threshold. • For example, the 39.6% rate would begin at about $350K of taxable income and apply only to income in excess of that amount. If a taxpayer had $100 of income over $350K, he would pay $39.6 in tax on that amount under BO’s plan, than the $35 under the JM plan. • Net tax decrease because tax increase on those making more than $250K is less than tax decrease for middle class. • Return to phase outs for personal exemption and itemized deductions. • Total tax revenues will be less than 18.2% of GDP, the level under Reagan. (c) S. C. Thompson, Jr, 09.04.08

  5. Tax Rates for Those Making More Than $250K (Cont’d) • Tax Policy Center Analysis of Impact on High Income Taxpayers (c) S. C. Thompson, Jr, 09.04.08

  6. Tax Rates for Those Making More Than $250K (Cont’d) • Tax Policy Center says: JM’s “tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households. . . . [By] “contrast BO offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers.” • Tax Policy Center Reports: “On the average, people with income below $100,000 would get more from Obama than from McCain. From $100,000 to $250,000, they’d be fairly even under Obama and McCain. For those over $250,000, Obama increases taxes.” (c) S. C. Thompson, Jr, 09.04.08

  7. Middle Class Tax Cuts • JM • Keep Bush Tax Cuts • Double the child deduction from 3.5 to 7K • BO • Keep Bush Tax Cuts • Families making less than $250K no new taxes • Seniors making less than $50K no taxes • $4K tax credit for college for those who commit to public service (c) S. C. Thompson, Jr, 09.04.08

  8. Middle Class Tax Cuts (Cont’d) • Tax Policy Center, finds • JM cuts average $325 • BO cuts average $1228 (c) S. C. Thompson, Jr, 09.04.08

  9. Alternative Minimum Tax, which Applies If a Taxpayer Has Significant Deductions • JM • Would phase out • BO • Would not repeal, but would continue to exempt the middle class from the tax. It would still apply to other taxpayers (c) S. C. Thompson, Jr, 09.04.08

  10. Low Income • JM • Keep Bush Tax Cuts • Double the child deduction from 3.5 to 7K • BO • Keep Bush Tax Cuts • Refundable 6.2% tax credit (i.e., taxpayer gets the credit even though he has no tax liability) for earnings up to $8.1K, a $500 tax cut for most workers • JM has criticized this refundable credit, but he also has a refundable credit for health insurance • Expands EITC, which Reagan supported • Nonitemizers a refundable tax credit of up to $800 for mortgage interest (c) S. C. Thompson, Jr, 09.04.08

  11. Capital Gains, For Example on Sale of Stocks • JM • Keep the current 15% Rate. The highest rate in the 1990s was 20% and Bush lowered it to 15% • BO • Raises the tax on capital gains highest two brackets (36% and 39/6%) to 20%, keep it at 15% for others • Eliminates cap gains taxes on small business • Taxes the owners of private equity and hedge funds on their carried interest as ordinary income not cap gains • Zandi a leading economist says: “Cutting capital gains taxes and corp tax rates are among the least effective ways to stimulate the economy.” (c) S. C. Thompson, Jr, 09.04.08

  12. Dividends Received on Stocks • JM • Keep the current 15% Rate. The highest rate in the 1990s was 39.6% and Bush lowered it to 15% • BO • Raise tax on dividends to 20% for taxpayers making more than $250, keep it at 15% for others (c) S. C. Thompson, Jr, 09.04.08

  13. Corporate Tax, Currently Highest Rate is 35% • JM • Cut the maximum corp tax rate from 35% to 25% • He says that we have the second highest corporate rate in the world • However, “U.S. corporate tax revenues have fallen well below the OECD average” that is below the average of are major trading partners. I p 187 Notwithstanding the high marginal rate, there are large tax loopholes. • First year expensing of equipment, apparently without limitation • Permanent tax credit of 10% of wages spent on R&D (c) S. C. Thompson, Jr, 09.04.08

  14. Corporate Tax, Currently Highest Rate is 35% (cont’d) • BO • Cut corporate taxes for companies that invest in the U.S. • Close corporate loopholes before cutting the corporate tax • Chairman of the House Ways and Means Committee, Rangle, has proposed closing loopholes and reducing corporate rates • Roll back incentives for O&G • Zandi a leading economist says: “Cutting capital gains taxes and corp tax rates are among the least effective ways to stimulate the economy (c) S. C. Thompson, Jr, 09.04.08

  15. International • JM • BO • Will stop giving tax breaks to corps that ship jobs overseas • Close down tax havens, costing the IRS $50 to $70B per year (c) S. C. Thompson, Jr, 09.04.08

  16. Simplification • JM • Optional Tax System based on a two rate structure, 10% income up to 100K and 25% thereafter • JM says revenue neutral but Tax Policy Center says it will cost because taxpayers will elect the lower tax • BO • Simple Return Plan, Pre-completed Tax Forms by IRS, Taxpayers only need sign and file, Available to 40 to 50M taxpayers, similar to current California plan (c) S. C. Thompson, Jr, 09.04.08

  17. Estate Tax • Currently • Under the Bush Plan the Estate Tax Would Be Repealed in 2010 • JM • 15% rate on estates worth more than $5M • BO • 45% rate on estates worth more than $3.5M, which is current law as of 2009 (c) S. C. Thompson, Jr, 09.04.08

  18. Social Security • JM • Opposes increasing the ceiling on SS taxes, which is currently $102K • BO • Increase on those making more than $250, by 2 to 4%, phased in after 10 years • $1000 credit for families to offset the SS tax (c) S. C. Thompson, Jr, 09.04.08

  19. Health Insurance • JM • $5K towards purchasing health insurance • This is a refundable credit, which is what JM has criticized BO for • Tax Policy Center says contributes $1.3T to deficit over 10 years • Tax employer provided health care for the first time • Trim Medicare and Medicaid • BO • $100B in Universal Health Care • TPC says contributes $1.6T to deficit over 10 years (c) S. C. Thompson, Jr, 09.04.08

  20. Plans Directly in Response to Credit Crisis • JM • No requirement to sell stocks held in a retirement plan at age 70 • Rate on withdrawals from retirement plans 10% in 2009-2110 • Cut cap gains tax to 7.5% 2009-2010 • CTJ says 75% of benefit goes richest 1% of taxpayers • Deduct $15K of cap losses • No taxes on unemp benefits (c) S. C. Thompson, Jr, 09.04.08

  21. Plans Directly in Response to Credit Crisis (cont’d) • BO • $3K credit for each new employee in the next two years • Sullivan says this is an incremental credit like the 1977-78 credit and won’t work • No penalty for withdrawals from IRAs and 401(k)s up to 15% or $10K (c) S. C. Thompson, Jr, 09.04.08

  22. Marginal and Effective Rates • The Evidence • Effective tax rates on taxpayers with more than $1M and more than $50M in income • The tax rates in 1996 were progressive across the full income range; in 2006 they are regressive, meaning the more you make the less you pay on a percentage basis (c) S. C. Thompson, Jr, 09.04.08

  23. Marginal and Effective Rates (cont’d) • The Reason: High Income taxpayers have larger amounts of dividends and capital gains that are taxed at a 15% rate (c) S. C. Thompson, Jr, 09.04.08

  24. National Debt • Tax Policy Center Reports that During Bush years, +4T • TPC Revenue Effects of JM and BO Plans Over 10 Years (c) S. C. Thompson, Jr, 09.04.08

  25. National Debt (cont’d) • TPC Increase in National Debt Over Next ten years from Spending and Taxes (c) S. C. Thompson, Jr, 09.04.08

  26. Progressivity and “Joe the Plumber” • JM • Attacks BO for his “Spreading the Wealth” statement to Joe the Plumber • Govenor Palin called BO a socialist • JM refers to BO as the “Redistributor-in-Chief.” • Surprisingly, these pejorative labels are directed at a policy that would reverse tax cuts for the wealthy enacted by Bush and initially opposed by JM who said the following in 2001: "I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans." • Was JM the “Redistributor in Chief” and a Socialist in 2001? (c) S. C. Thompson, Jr, 09.04.08

  27. Progressivity and “Joe the Plumber” (cont’d) • What would happen to Joe if he were successful in buying the business and making over, say, $350,000 per year? • The $4.60 Debate: Under the current Internal Revenue Code, for each $100 Joe earns over $350,000, he would pay a tax of $35. Under BO’s tax plan, for every $100 Joe earns over $350,000, he would pay a tax of $39.60. Thus, BO’s plan would tax Joe an additional $4.60 for each $100 Joe makes over $350,000, and this $4.60 is the basis of the argument around Joe the Plumber. • What would be the economic effect of the increase in tax on Joe’s income and would it be fair? (c) S. C. Thompson, Jr, 09.04.08

  28. Progressivity and “Joe the Plumber” (cont’d) • Economic effect. Senator McCain says that the additional $4.60 will destroy jobs in small businesses. This statement is flat wrong for at least three reasons. • First, 80% of those subject to a tax increase are not owners of small businesses. • Second, similar arguments were made in 1993 by the opponents of President Bill Clinton’s proposal to increase the top marginal rate from 35 percent to 39.6 percent, but that tax increase was followed by the greatest economic boom since World War II. • Third, apart from the 1990s, the two highest periods of economic growth since the depression were (1) from 1941 through 1944, and (2) from 1962 through 1969. • In both of these periods of high economic growth, the top marginal tax rates were significantly higher than they are today: 94% in the 1940s and 70% in the 1960s. • Given the direct relationships between high marginal rates and high economic growth, it is a gross overstatement for JM to claim that increasing the top marginal rate from 35% to 39.6% is going to lead to a loss of jobs. (c) S. C. Thompson, Jr, 09.04.08

  29. Progressivity and “Joe the Plumber” (cont’d) • Fairness. Different people have different views of fairness. However, throughout the history of the income tax the rates have been progressive, meaning that the more a person has in taxable income, the more the person pays proportionately in tax. • Even under Bush’s current rate structure, the system is progressive, ranging from 10% to 35%. • BO would simply increase the progressivity by reinstating higher marginal rates for taxpayers making more than $250,000. • The system could stand more progressivity for the Economist Magazine reports that “income distribution in America is the widest of the 30 countries of the OECD. The top 10% (or decile) of earners have an average $87,257 of disposable income, while those in the bottom decile have $5,819, among the very lowest of any country. • Since we have always had a progressive income tax system, most informed Americans would likely think that such a system is fair. And, I believe that most informed Americans would believe that the view of progressivity held by BO today and by JM in 2001 is fairer than JM’s view of progressivity today. I also believe that if Joe the Plumber took the time to understand the real issue in this $4.60 debate, he too would think Senator Obama’s proposal is fair. (c) S. C. Thompson, Jr, 09.04.08

  30. Progressivity and “Joe the Plumber” (cont’d) • One final point: • When Senator McCain’s father and my father were fighting for this country during World War II, the most well-off Americans were subject to a $94 tax on each $100 subject to the highest bracket, and when Senator McCain and I were fighting for this country during the Vietnam War, the most well-off Americans were subject to a $70 tax on each $100 subject to the highest bracket. • But now that this country is in the middle of wars in Iraq and Afghanistan, Senator McCain claims that BO’s plan to raise the marginal rate on the most well-off Americans by 4.6 percentage points from 35% to 39.6% is socialist. Every informed American, whether Republican, Democrat, or Independent, needs to understand why Senator McCain’s statement is not true. (c) S. C. Thompson, Jr, 09.04.08

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