What the Presidential Candidates Want to Do with Income Taxes

Following up on my post titled Taxes and the Leading Presidential Candidates, I wanted to share this CNN Money story on what the candidates have to say specifically about income taxes. I can't include all the things each one is proposing, but here are the highlights:

• Clinton: Has proposed allowing portions of the Bush tax cuts expire for those making more than $250,000 while preserving them for everyone else. In addition, she would reduce certain tax exemptions for those making more than $250,000. Has also suggested limiting the amount of tax-free compensation high-income employees receive from their employers to help pay for health insurance.

• Obama: Wants to eliminate income taxes for seniors making less than $50,000. Favors letting the Bush tax cuts expire for those making more than $250,000.

• Edwards: Would repeal the Bush tax cuts for households with more than $200,000 in income.

• Giuliani: Favors making the Bush tax cuts permanent and lowering corporate tax rates. He has indicated he may like to lower marginal rates further. When it comes to the AMT, Giuliani has said he would index income exemption levels to inflation to protect middle-income families from being subjected to the "wealth" tax, which disallows a number of popular tax breaks that are used under the regular income tax code.

• Romney: Has said he favors making the Bush tax cuts permanent and lowering corporate taxes. He has also promised to oppose any effort to increase taxes as president. He also has proposed eliminating the tax on interest, capital gains and dividends for taxpayers with adjusted gross incomes under $200,000.

• McCain: Has called for a simpler, fairer tax code and favors eliminating the Alternative Minimum Tax. He also has said he will work to keep taxes low and supports making the Bush income and investment tax cuts permanent.

• Thompson: Has proposed making permanent all of the Bush tax cuts, abolishing the alternative minimum tax and the estate tax, and lowering corporate income tax rates. He also has proposed giving taxpayers a choice: to pay under the regular federal income tax code or to opt for an alternate flat-tax system.

• Huckabee: Supports getting rid of the income tax system and replacing it with what's been dubbed the "Fair Tax." That tax would raise federal revenue by way of a national sales tax. That is, you would pay federal tax on what you spend rather than on what you earn, save or invest.

The new information here for me was Thompson's idea of two ways to pay your income taxes. I hadn't heard of that proposal previously.

The piece also contained a few more details on Huckabee's "fair tax" that was discussed so much in the comments of my last post:

All taxpayers would receive a monthly check equal to the amount of tax someone at the poverty line would pay. That would ensure no one pays tax on essentials and protects those living at or below the poverty line from paying taxes. For everything else you purchase, you would end up paying what works out to be a 30 percent tax on top of the price. So for something that costs $1 you would pay $1.30. That extra 30 cents represents 23 percent of the final purchase price ($1.30), which is why you will hear Fair Tax proponents say that the tax rate under the Fair Tax is just 23 percent.

In any case, some analyses of the plan suggest that in order for the Fair Tax to raise as much revenue as the current tax system, the sales tax rate would have to be considerably higher.

For me personally, the "fair tax" would probably be a windfall. I'm a fairly frugal person relative to my income, so my taxes would likely drop by a pretty good measure. Then again, from what I understand, there's no itemizing with the "fair tax" (because their is no filing -- you pay as you buy), so maybe it wouldn't benefit me (I have some decent deductions for charitable giving.) I guess I'd have to see the details before I knew if it was a good deal or not.

But the principle seems fine with me -- tax people on what they buy/spend/consume, not what they make. I know, as we've said before, there's often not much difference between what people make and what they spend, no matter the income level, so maybe it won't matter that much. But I do like the idea that saving (less consumption) is rewarded. In addition, I'd guess we'd get rid of much of the IRS and many accountants/lawyers, saving the taxpayers (IRS) and me (accountant) a good amount of money.

But really, does anyone think this idea has a shot politically? I'm thinking "no way."

Comments

[That One Caveman]

One of the things that's said about Fair Tax is that it also taxes the black market. The reasoning is that the IRS doesn't see any gains from income tax from illicit purchases (e.g. drugs), but under the Fair Tax, the drug dealer will end up paying taxes because he will use that money to purchase goods. The down side to that is that law enforcement often uses tax evasion as a way to get at people who are really good at hiding their other crimes, but that would not be an option under Fair Tax.

I'm undecided on the Fair Tax, but I'm glad it's in the discussion and forcing people to think about better ways to raise public money.

[Chris P]

Lobbyists and other special interest groups will keep the fair tax from passing. Not only that, but economic growth will get worse in this country since no one will spend any money. Underground markets will appear and the tax will not be paid. Also, charities will suffer. No way this happens!

The reason the Fair Tax is quoted inclusively is because it allows a fair comparison to how our current income is quoted, as a percentage of our gross income, not as a percentage of the net, which would be considerably higher.

[Thad]

Doesn't the Fair Tax effectively punish anyone who has been saving for retirement in a ROTH IRA, though? You've already paid the tax, hoping for tax-free income at retirement... only to find out the govt will now tax you on everything you spend that money on.

[ryan]

no inclusion of Ron Paul or his tax plans?

[Aaron]

The Fair Tax is completely possible. However, the only way it will pass if Americans band together and fight to take the government back from the politicians and lobbyists!

Without popular support and faith that it will work ($20 million in research by some big name Ivy League and other economists say this plan WILL work), the Fair Tax will never become law. Fight for what you believe in, people! :)

Huckabee may just get my vote for the FairTax alone. I can live with some of his other stances if we have a more just and sensible tax system.

[garyatk]

Isn't it funny how the best candidates get left out? Educate yourself on the issues. Take a look at Ron Paul and Allen Keyes, The best candidates if you like your freedom!

[FMF]

FYI -- The CNN article I linked to didn't include Paul and Keyes (or even Richardson, though no one mentioned him). I'm guessing it's because they are not deemed to be viable candidates.

[Dan D]

The Fair Tax would disproportionately burden the poor and get strong opposition from the Democrats. Think about it, if you make $23k a year, almost every cent you earn is being spent on food, rent, car payments, etc. So nearly every penny is taxed. Conversely, those who are fortunate enough to be doing better have money in savings & investments -- where it is free to accumulate tax free. It's a great idea on the face of it until you sit down and think about the repercussions on the poor. Further, it removes the ability of Congress to use the tax code to 'incentivize' specific economic activities. The reason the tax system is so complex is that politicians assume (perhaps rightly so) that people are motivated by their own bottom lines, and if they reduce the cost of doing something they feel is in the national interest (i.e. home ownership), more Americans will subscribe to such activities. While this isn't the forum for a politics discussion, just wanted to make sure opposing views are represented.

[Kevin]

Thompson wants to abolish the alternative minimum tax, but institute an alternative flat-tax system? Sounds like a great idea, let's abolish one alternative flat-tax system in favor of a different one! Genius!

As far as getting rid of the IRS, it ain't gonna happen. Even if we go to a Fair/flat/national sales tax, they will still be there to collect and enforce, just as they do now. The IRS isn't really the problem when it comes to taxes, Congress passes the laws.

As a CPA, I am torn. A big part of my business is tax-related, but I can see the benefits of a national sales tax instead of income tax.

[Paul S]

One of my main issues with the consumption tax is that it seems impossible to enforce completely. There will be a new role for the IRS, to be sure, in collecting taxes from those who sell a product, but I can't imagine the size of the bureaucracy that will have to be instituted to monitor daily business activity at a micro level. My other issue with the consumption tax is the likelihood of a large black market forming. Consider this: If you sell a product, would you collect the tax and then pass it on to the government, or keep it for yourself? There are certainly ways of controlling this behavior, but I'm a skeptic.

I'm also one who doesn't favor taxing the poor disproportionately. If they are spending nearly 100% of their income on consumption and taxes, what's left for them to save? Hard work and saving used to be a way out of poverty, but with a tax system like this I'm pretty sure class mobility would take a serious hit.

[paul]

All of this is really pretty much a moot point. The constitution doesn't allow the president to make laws (well...I'll just leave it at that). Tax related legislation must originate in the House of Representatives, which means it has to get approval from 435 people plus another 100 before it even gets to the president, and the president can't write the bill himself, a representative must write the bill. Of course the president could veto a bill, but congress could override the veto.

Anyway, my point is that this is a favorite discussion point for presidential candidates, because it gets people to vote for them, but in the end the presidential candidates have little control over it. The president of the United States is not an absolute monarch...although we seem to be heading that way, but I digress again.

Wasn't income tax illegal at one point in our history but somehow passed during WWI?

If so, how did the gov. get $ back then?

[Andrew]

Ron Paul would abolish the IRS!

[FMF]

Andrew --

It cracks me up that your email address is from Canada. I assume you're an American who's living in Canada, correct?

[Kevin]

Abolishing the IRS is a fallacy. Someone has to collect revenue, Congress surely isn't going to do that. The "Internal Revenue Service" doesn't write the laws, they just take the heat for it.

[Mike W]

Please do a bit more research on the Fair Tax before making the blind comments about it being unfair to the poor, etc. The system includes "prebate" checks up to the poverty level and includes basic credits or rebates up to the cost of the necessary vital items for living.

This would effectively mean that many of the poorer people of this nation would not be paying taxes because even under the current system they are just buying the essentials. In fact they would do better.

I also think this would not hurt giving. It will hurt the giving from people who give to get, yes. But the people who give because it is the right thing to do can now afford to give more. As I am becoming more frugal, I realize that a good portion of my money is spent on housing, bills, tithes, saving and necessary expenses. With maybe 200 a month spent on things that wouldn't be considered necessary. I believe for myself I would see a savings of about $350 - $500/pay period in taxes even after the sales tax is added to my spending (that is for the $200 extra and the necessary expenses). This would mean I could theoretically give $700-$1000 more to charity or increase savings/mortgage paydown and still maintain my current level of 10% of my gross income to tithe with extra when I can to charity.

I like the Fair Tax. My sister is in a different boat (the same boat I was in until recently, we have very modest upbringing, clung to the poverty level when we were growing up). She is recently married with 1 child and one on the way. She works a job that pays just over minimum wage, her husband not much more. They rent while trying to save what they can. Their spending is mostly on living expenses. With the prebates/rebates they would actually be able to get those living expenses handled without worry, have more to save towards mortgage downpayment and even have a little leftover for some of that discretionary spending we all do. So they would do better and become more prosperous. The economy would see a bit more cash into it because they would actually spend more and they would be that much closer to owning a home.

[Casey]

Read the FairTax Book by Neal Boortz if you truly want to learn about the FairTax.

The quoted figures are not true. The FairTax is an inclusive tax, just as the current Income Tax is. It is quoted as 23% of the final purchase price, not added onto the price at purchase time. Therefore, an item that is listed as costing $100 includes $23 of tax in the list price. It is not increased to $130 at the cash register.

In regards to the FairTax placing an undue burden on the poor, that is patently false, and shows a fundamental misunderstanding of the plan. As was stated in FMF's post, the FairTax provides for a "prebate," or monthly stipend of the taxes each taxpayer would pay up to the poverty level. This prebate completely UN-taxes the poor.

Furthermore, the framework of the FairTax is that we would eliminate not only the IRS, but all other direct federal taxes as a whole. Income tax, capital gains, payroll tax (the most regressive of our current taxes) - gone. Therefore, you have 25-40% more buying power immediately following enactment of the FairTax. Not only this, but corporate income taxes that are currently included in prices (face it, in truth corporations pay no taxes at all - consumers pay their taxes for them) are also eliminated and replaced with the 23% inclusive sales tax. You effectively have a 2-17% decrease in your overall tax burden!

And finally, there are no deductions because there is no need for them. You are no longer taxed on capital gains, including appreciation on your home, and your federal tax burden is lowered. This plan will create an environment that is appealing to savers and spenders alike.

[Mike W]

Paul S -

How do you think the 45 or so states that have a sales tax are able to survive? Sure there are black markets that form and that is a problem in some states but there are ways of handling that.

I think the IRS (or whatever agency would collect) would actually be smaller. With our current tax code, loopholes and grey areas a lot of money and time is spent finding potential fraud, investigating it, proving it in tax courts and then prosecuting/collecting it. A lot of time and money is spent on last minute changes to forms (like right now with the AMT delays).

Most businesses and governments understand how to collect on a sales tax. This would be the same thing but at a federal level.

[Kevin]

Casey - there are no deductions because no lobbyists have influenced Congress to create them yet. You really think this won't happen eventually?

Here in Missouri we have a lower sales tax rate for groceries. There are always loopholes.

[Lord]

Fair tax proponents should try replacing the corporate income tax with it first. They are the ones that do most of the lobbying, distort the laws, and complicate things. It would probably be more revolutionary for the political system than changing the personal income tax.

[Rach]

Why doesn't the old media (CNN) include Ron Paul and his proposals in this line-up?

[amx511]

I've looked somewhat at FairTax and like the idea. I really like how it encourages frugality by taxing consumption. However, there are still several things that I'm still not satisfied with:
1. On administration: how do you give prebate to homeless people? Will there be prebate-center for them? How do they get there? Will they have to be finger-printed to prevent double-dipping?

2. On globalization: what is to prevent me from moving my income to investment and liquidate it outside of the country, use the money to purchase goods and have it shipped back to me? Wouldn't this hurt the poorer people who cannot take advantage of this loophole?

3. On stock market: do I get taxed when I buy/sell stocks? How about tax on capital gain/loss? How about my Roth IRA (like Thad said earlier).

[Deezer]

Yes, I do think the FairTax has a shot politically, first at the state level, and then when that proves to be a success, at the national level.

In Michigan, there is a good possibility that the FairTax will be on the ballot in November 2008. If this passes, it will significantly stimulate the Michigan economy by eliminating all business taxes (reducing cost of goods and encouraging businesses to come to Michigan), putting more money in people's pocket to spend (no more state income tax), and tax illegals and those in the underground economy, generating millions if not billions more for the state government, which may allow them to further reduce the tax burden on everyday citizens.