Obama Unveils Comprehensive Tax Plan

First, let's get the business out of the way:

• Obama's campaign revealed his comprehensive tax plan today, which can be found here.
• Jason Furman and Austan Goolsbee, the economic policy director and a senior economic adviser, respectively, at Obama for America, penned an op ed piece for the Wall Street Journal, which was published today.
• A summary of the tax plan can be found after the jump.

After reading the tax plan, the op ed, and participating in a conference call held by the Obama campaign (featuring Messrs Furman, Goolsbee and Professor Larry Summers) discussing the tax plan, the message to me seems very clear: we are finally moving away from an era of reckless government.

Say what you will about the "taxocrats" or the "spendocrats," but which plan sounds more middle-class friendly, and more fiscally responsible?

One where additional tax cuts are given to the middle-class (defined as families making less than $250,000 a year) while new taxes are levied upon those above the income threshold, for a net tax cut which is small enough to be offset by responsibly ending the war, reducing payments to private plans in Medicare, limiting payments for high-income farmers, reducing subsidies for banks, and eliminating other wasteful government spending?

Or one where an additional $3.4 trillion (over 10 years) in tax cuts directed at corporations and the affluent are granted, the estate tax is repealed altogether (and let's be perfectly clear, the estate tax only impacts family estates with over $7 million in assets), subjecting normal taxpayer to additional taxes to be paid upon any health care benefits provided to him/her by his workplace, leading to an enormous decrease in government revenue, all of which is supposed to be offset by reducing government pork (estimated to be between $13-14 billion per year, compared to the $90 billion per year that the Obama campaign is estimating will be saved within 4 years by ending the Iraq war)?

The biggest surprise I experienced in wading through Obama's tax plan is this message that his advisors are constantly iterating: they admit that their tax plan will hurt those higher earning families, many of whom may have had painful losses during the recent credit crunch. However, they firmly believe that the specter of tax increases must be borne to avoid the kind of crippling future this country will experience if we continue down the road of fiscal irresponsibility embarked upon by Ol' King W.

There is nothing particularly surprising about Senator Obama's tax plan, much of which is consistent with what Obama has been alluding to since being on the campaign trail. Some of the highlights of his plan:

• No family making less than $250,000 (or individual making less than $200,000) will see their taxes increase;
• Families affected by the increase of tax rates are seeing their rates return to those they paid in the 1990s;
• The capital gains and dividend tax rates will be increased to 20% (from 15%) for families earning over $250,000 a year;
• For those below the income threshold, there will be a credit of $1000 provided for working couples and a $500 credit for working individuals;
• Income tax will be eliminated for seniors making less than $50,000 per year;
• Increase number of working parents eligible for earned income tax credits;
• Make the Child and Dependent Care Tax Credit refundable and allowing low-income families to receive up to a 50% credit on the first $6000 of child care expenses they accrue.

I am not an ardent, cheering fan of the Obama tax plan. It is a moderate plan that backs a central tenet of his campaign: saving… or at least supporting… the floundering middle class. It not only reduces the amount of taxes that will be paid by the median American family, but it also increases the revenue brought in from the top earners in America to fund certain programs, universal health care and other safety net benefits, that are increasingly important to middle-class American families as we work through this economic downturn. It is also, in my opinion, a far more fiscally responsible plan than anything I have seen coming from the McCain camp.

Unfortunately, what I did not see was any significant commitment to simplifying the tax code (though there is a provision to simplify tax filing for those who take the standard deduction) nor to fixing the deeply flawed Alternative Minimum Tax. There was also only marginal movement in equalizing the tax consequences of labor versus wealth. Although Obama's plan increases the tax rate for capital gains and dividend income to 20%, this is still significantly above the highest (proposed) income tax rate of 39.6%. For the very wealthiest (those in the top 1%, or those earning over $1.6 million per year) that can afford lawyers working at $300/hour, this leaves open an enormous hole to structure income as capital gains (though the tax people are, apparently, closing the evil hole that is "carried interest"). Leaving the majority of the tax burden squarely on the shoulder of the upper-middle class (those earning between $250,000 and $1.6 million), a class that I personally aspire to and think is, on the whole, kind of good for America.

Finally, there is the question of the so-called "marriage penalty". Since the increased taxes will kick in for families earning above $250,000 and for individuals earning over $200,000, the New York Sun asked today whether Obama's plan is increasing the marriage penalty to "punitive proportions" and about the deleterious effects that such a marriage penalty may have on women as the 2nd earner in a family. I asked the Obama campaign to respond to these criticisms today, and his advisors noted the following: that the Obama plan does not kick any family into the marriage penalty that had not already been subject to the marriage penalty (though for those in the higher brackets, the consequences may be more severe) and that there are no differences with regard to who suffers tax penalties or get tax benefits between the McCain and Obama tax proposals. However, Obama's advisers made it abundantly clear that they believed when taken in the context of Obama's overall agenda for working women, there is a tremendous difference between the two candidates, and Obama's platform clearly provides greater support for women in the workplace.

Update - I had some requests to address small business/corporate tax issues, so here they are.  Under Obama's plan:

• all capital gains taxes on investments in small and start up firms will be eliminated;
• tax breaks that encourage the movement of capital and labor overseas will be eliminated (there is currently a permanent deferral available to corporations who earn income abroad and don't repatriate those funds.  This is different from what is available to individuals, which is a permanent deferral on the first $85,000 of income earned abroad, but then taxation on the remainder, with offsets against taxes paid to foreign governments);
• a refundable tax credit for employee health premiums paid by employers;
• R&D tax credits will be made permanent;
• codifying the economic substance doctrine (tax benefits granted to a transaction will not be allowed if the transaction does not have economic substance that the tax benefit was meant to foster) as a means for closing down tax shelters;
• eliminating special tax breaks for oil and gas companies.

Second update:

A senior policy analyst of the conservative Heritage Foundation said "the middle class would likely pay less under Mr. Obama's plan than Mr. McCain's" and is praising Obama's proposals to increase tax rates on capital gains and tax rates. The Heritage Foundation is now joining the National Review, which in an earlier editorial lamented that "the McCain plan… offers very little in the way of direct benefits to Americans in the middle of the income scale."

Cartoon via In One Ear... Out the Other.

Kady waxes lyrically on taxes over at Loaded Dice.

Comments

[Jessica Gottlieb]

Let me tell you what won't happen when you penalize the "rich" who make over $250 a year while MARRIED. You know your child's fundraiser? Nope, sorry, can't give you $25 I'm tapped out.
Dinner out, no way. Small businesses will pay the price as will all of your beloved "non profits"... FYI when the first salary comes into play I think it's a busines.
I'm pissed that allegedly we're rich. Our children's schools are failing miserably (50% graduation rates in Los Angeles) so I'm forced into working so my kids can go to private school? All this AFTER I pay more than my fair share in property taxes.

I am telling you that the gardener will be fired along with the pool guy and families in Van Nuys will starve while teenagers in more affluent suburbs of Los Angeles will roll up their shirtsleeves.

It's a complete effing disaster. If you want some tax money back try firing the 35 illiterates who "work" in city hall.

Shrink the effing government back to a reasonable size, get out of my personal life and take your sticky fingers out of my wallet. I'm very careful with my checkbook, I expect the same of my politicians.

[Jessica Gottlieb]

One more thing...

look down, those are called bootstraps, try tugging on them.

[cynematic]

What I find interesting is how Obama's proposals for women who work for themselves (http://my.barackobama.com/page/community/post/laurinmanning/gGxDJD) intersect with his overall tax policies that help the middle class.

He specifically said that women-owned small businesses will have their capital gains taxes rolled back to zero. As a micro-entrepreneur myself, that's music to my ears. Many more women are finding a niche that can bring in income *and* allow for work-life balance, and they do this by being their own bosses.

It leaves women who work for The Man (so to speak) in a tougher spot. But hopefully 7 paid sick leave days, equal pay for equal work, and expanded family leave programs and expanded early childhood education programs will help bring back some of the safety net that women who walk the tightrope of working outside the home currently feel is missing.

As for Jessica's comment above: I agree--shrink the government back to a manageable size.

Let's start with the military, and the $85 billion paid to military contractors that's unaccounted for (http://www.nytimes.com/2008/08/12/washington/12contractors.html). Because clearly the defense budget is bloated through 8 years Republican excess, and exactly what results do we have to show for it?

[Lawyer Mama]

Great comprehensive post, Kady!

I completely agree with Cyn.

I'm also confused and concerned about the $250K per family versus $200K for individuals. The couples it will affect most are well educated professional women - the same women we want to *stay* in the work force, not leave it. I'm just curious as to why the campaign chose to go that route. Before I quit my job 2 weeks ago, this would have affected me & my hubby pretty seriously. I certainly don't mind paying more in taxes, but I have to admit that the great disparity between married and single does seem almost punitive.

[kady]

Yeah, I have to do more research on the marriage penalty, which I didn't have time to do b/4 posting, since, as you know LM, is kinda complex.

The Obama campaign's answer was unsatisfactory to me (though they are supposedly submitting a response to the Sun, which I cannot find yet). They were effectively saying, yes, it sux, but it's no different than under McCain, except the marriage penalty will now cost more.

My personal take is that the Bush tax cuts should probably have been done away with altogether, but right now, with a significant portion of the population unable to even survive paycheck to paycheck, that's just a recipe for disaster.

[Jessica Gottlieb]

Oh Cynematic the "need" for women's initiatives should have you screaming for blood.

I'm so enraged I may politi-blog today. But first I'm going to go and ask my husband permission to share my thoughts with y'all.

*snark*

[lildb]

great run-down of the thing, Kady. i feel better-educated after reading it.

i'm still sitting here wondering whether they're going to attempt to tackle taxing the wealthiest 1%? is that just a total impossibility? surely those people, the ones who make the most off of the backs of the working class, can somehow get caught in the same great net of the IRS the rest of always are ensnared by? surely we can close off those goddam loopholes?

and then there's the ridiculous, untenable sum of money going to defense for BIG, USELESS WAR TOYS. and contractors who "lose" their checks for billions in inexplicable ways.

etc.

sigh.

oh, and bootstraps? really, Jessica? did your bootstraps get handed to you by a contractor in Iraq who had an extra few million lying about in illicit, read, stolen, US taxpayer money? b/c nobody else can afford them right now. enjoy those bootstraps, sister.

[Julie Pippert]

Thank you x10 Kady. This is a great rundown starting point, and like Cyn, LM and lildb I am left with a few more questions. Like Cyn, as a female entrepreneur of a small business, it sounds reassuring compared to my current worries. I will wait hopefully for additional information. I enjoy your tax and money talks. :)