My Point of View


Fuzzy Tax Talk

Knight Kiplinger

The presidential candidates are sketchy on the details, but here's what we know about their plans to modify the tax code.



Do you care about taxes -- how much you pay and whether other people are paying what you perceive to be their fair share? Undoubtedly, you do. So let's see how the remaining presidential contenders -- Clinton, Obama and McCain -- propose to modify the tax code.Details are often sketchy because specificity tends to mobilize opposition and alienate rich donors. For example, all three favor efforts to slow the spread of the dreaded alternative minimum tax. But none has fully explained how to replace the enormous (and growing) revenue generated by the AMT.

The biggest difference between Republican John McCain and Democrats Hillary Clinton and Barack Obama is what they would ask Congress to do about the 2001 and 2003 Bush tax cuts. Those laws slashed tax bills of low- and middle-income families, sometimes down to zero for those with several children (each of whom is now worth a $1,000 tax credit). The percentage declines for upper-income people were much smaller; but in terms of actual dollar amounts, the wealthy received the bulk of the savings because they pay the most income taxes.

Tax rates

McCain, the presumptive GOP nominee, voted against the Bush tax cuts, but he now prefers to keep them in place and make them permanent. Clinton and Obama say they would leave things as is for middle-income taxpayers but raise the marginal rates for those with incomes higher than $250,000. The top rate today is 35% (for individuals and couples with taxable income of $350,000 and higher), down from 40% before the Bush reductions.

McCain would also keep the current 15% rate on capital gains. Clinton seems to favor restoring the 20% rate; Obama is eyeing a top rate of 25%. That would be even higher than it was before the tax reforms in 1986.

Estate taxes

All of the candidates have something to say about these taxes, which are controversial, even though fewer than 1% of all estates are subject to them. No contender favors letting estate taxation die in 2010, as now scheduled. Clinton favors letting $3.5 million pass to heirs tax-free, the level the estate-tax exemption will reach next year. Beyond being opposed to full repeal, Obama hasn't spelled out his position. McCain wants to increase the exemption to $10 million and cut the maximum rate from the current 45% to 15%.

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Corporate taxes

Obama and Clinton would be okay with leaving the top rate at 35% but would seek to tax more income earned abroad and try to close any loopholes. McCain would ask Congress to lower the top rate to 25% or 30% but would also go after corporate tax subsidies.

Fixing FICA

We haven't heard much from the candidates so far about the tax that accounts for the largest amount that most Americans pay to the Treasury each month. It's not the income tax but FICA, the payroll tax that finances Social Security (6.2% of earnings up to $102,000 for the employee's share) and Medicare (1.45% of all of an individual's earnings).

Because of those flat rates, Social Security and Medicare taxes are regressive, falling more heavily on less-wealthy taxpayers. Any changes to payroll taxes must be part of the coming debate over how to put Social Security and Medicare on a sound financial footing for the long term.

Democrats are likely to suggest placing more of the FICA burden on high-wage earners, by jacking up the earnings limit or applying it to all earned income, as with Medicare. And as a salve for low-earning folks, FICA rates could be lowered a little. Any change to FICA taxation is bound to be highly contentious.

Every voter will view his or her self-interest -- and the nation's interest -- differently in all of these tax proposals. I hope you will take the trouble to press for more information on where each candidate stands. They owe it to us taxpayers.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine and of The Kiplinger Letter and Kiplinger.com.



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