Hot Topic on the Campaign Trail: Tax Cuts

The major presidential candidates are all eager to tell you which taxes they want to cut -- but they're not talking about how they'll pay to do so.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

September 11, 2007

Presidential candidates, already in the throes of a heated campaign, are staking out their tax positions. Not surprisingly, most of the talk is about which taxes they want to cut -- not what tax hikes might be needed to finance the goodies they're pushing for.

The focus is on what to do about the Bush tax cuts expiring in 2010, which include the lower marginal rates and the 15% top rate on capital gains and dividends. The three leading Republican candidates -- former New York City Mayor Rudy Giuliani, Sen. John McCain of Arizona and former Mass. Gov. Mitt Romney -- want the tax cuts made permanent for folks in all income tax brackets. (The newest GOP entrant, Fred Thompson, former senator from Tennessee, says he wants lower taxes but hasn't offered specifics yet.) Those leading the pack for the Democrats -- Sen. Hillary Clinton of New York, Sen. Barack Obama of Illinois and former N.C. Sen. John Edwards -- would keep the cuts only for low- and middle-income taxpayers. For Clinton and Obama, that's defined as people with annual incomes of $250,000 or less, while Edwards would set the ceiling lower, at $200,000.

The party lines are blurrier on what to do about the estate tax, which under current law will be repealed in 2010 but comes roaring back in 2011 with a $1-million exemption amount and a 55% top rate. Giuliani and Romney would permanently repeal it. McCain and the top Democratic candidates, meanwhile, would keep the estate tax, though with a much higher exemption amount so that it would be limited to the very wealthy.

One thing this campaign is NOT about is a big tax overhaul. There's talk by the leading candidates about simplifying the tax code and easing the alternative minimum tax, but none of them offers any radical solutions. There are no calls for abolishing the IRS or gutting the income tax in favor of a flat tax or national sales tax. Edwards gets the most specific on simplification: He would let wage earners stop having to file income tax returns by having the IRS figure their taxes from their W-2 and 1099 forms and send them a bill or a refund.

Instead, the candidates prefer to talk about new tax cuts they're proposing, in the following areas:

• Savings and investment. Romney wants to exempt middle-income taxpayers from taxes on capital gains, dividends or interest they earn. Edwards would give a $500 savings credit to families making up to $75,000.

• Health insurance. Giuliani proposes to allow families to deduct up to $15,000 a year to purchase insurance policies. Romney would let folks deduct all premiums, deductibles and copayments.

• Incentives to conserve energy. Clinton suggests new credits for fleet owners to buy more-fuel-efficient cars. Obama wants breaks for automakers that retool assembly lines for alternative fuel vehicles.

How would the major candidates pay for all this largesse? The Democrats want some tax hikes: Clinton would raise taxes on corporations, while Edwards and Obama would hike capital gains tax rates on the wealthy. The Republicans say they would rather decrease spending than raise taxes. But no candidate in either party has laid out a specific plan for how to tackle the tax train wreck that the next president and Congress will face: Keeping even some of the Bush tax cuts while permanently easing the estate tax and the AMT could cost more than a trillion dollars. That means Washington will be forced to gore someone's ox. Stay tuned.

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