Both candidates for the White House are spewing a lot of rhetoric on taxes. But what exactly do the buzzwords mean and how would their proposals affect you? By The Kiplinger Washington Editors January 1, 2012 Cut through the political claptrap on taxes from President Obama and Mitt Romney, his GOP rival for the White House, and here’s what you find: Neither candidate’s package will fly. Both plans fall short on raising revenue to help trim the federal deficit. And neither accounts for the political realities of a closely divided Congress.SEE ALSO: Are You Better Off Than You Were 4 Years Ago? In both cases, some details are being kept deliberately sparse, lest they set off alarm bells before the election. And no matter who is elected on November 6 -- or which party holds the reins in the both houses of Congress -- tax reform will be a challenging puzzle. Monkeying with tax rates and deductions plus scores of special breaks is like trying to solve a Rubik’s Cube. Every time one piece is moved to bring it in line with the ultimate goal, two other pieces fall out of line. Moreover, any adjustment upward in one component requires an offsetting adjustment in another -- both to keep the impact on the federal budget in check and to spread around the political pain. Here’s what is known now about the candidates’ proposals and what they might mean: Advertisement -- Individual rates. Romney wants to cut 20% from current rates for taxpayers at all income levels. The means those in the lowest tax bracket would go from paying a marginal rate of 10% to paying 8%; those in the highest bracket would see rates fall from 35% to 28%. Obama wants to raise tax rates, but only on folks with incomes above $200,000 ($250,000 for joint filers). That means the two top rates would go from 33% now to 36%, and from 35% to 39.6%. -- Capital gains. Obama’s idea is to raise the top rate paid by upper-incomers to 20%, leaving the maximum at 15% for everyone else. Romney’s proposal is to eliminate taxes on capital gains for everyone except high-incomers. They would continue to pay a rate of 15% on long-term gains. -- Dividend income. Romney wants to treat dividends just as capital gains would be treated under his plan. Obama’s goal is to tax the income earned on stock investments as if it were ordinary income -- salaries and wages, for example -- for the wealthy. In other words, the wealthy would pay much higher tax rates than they do now. For everyone else, the current 15% rate on dividend income would remain in place. Advertisement -- Interest on municipal bonds. Romney says that ending the tax free status that investments in municipal bonds now enjoy is one way he might try to offset the budgetary cost of lowering tax rates for everyone. But he hasn’t committed to it. Obama has said he wants to limit but not end the break, and only for upper-incomers. Taxpayers with incomes above the 28% bracket would effectively end up paying a tax of up to 11.6% on muni bond interest. The interest would remain tax free for those in lower brackets. -- Employer-provided health care. Obama wants to take the same approach as for muni bond interest on the value of health care plans paid for entirely by employers. Higher-incomers would effectively pay a tax of up to 11.6% on the value. Those in lower brackets wouldn’t. Romney, again, says only that he would consider limiting the full exclusion of employer-provided health care for upper-incomers. -- Mortgage interest, charitable deductions and other write-offs. The president’s preference is to sock it to high-incomers. He’d take a slice off their itemized deductions by reinstating a paring that lapsed in 2009 (equal to 3% of the amount by which filers’ adjusted gross incomes exceed $200,000 for singles and $250,000 for marrieds). Deductions for medical expenses, casualty losses and investment interest paid wouldn’t be affected. In addition, for high-incomers only, Obama would put an overall cap on the value of all their itemized deductions plus their write-offs for items such as college tuition, student loan interest, self-employeds’ health insurance and payins to IRAs, 401(k) plans and health savings accounts. In contrast, Romney wants to limit all deductions, including those for home mortgages and charitable giving, for all taxpayers at all income levels. Though the cap he has suggested is just $17,000, the GOP candidate has made it clear that there’s lots of wiggle room to raise the ceiling much higher -- to $25,000 or even $50,000. Of course, there is an implicit trade-off under Romney’s proposal: The higher the ceiling on the deductions or the bigger the exemptions to it, the smaller the cuts in tax rates can be. And vice versa. To maintain the amount of revenue coming into the U.S. Treasury through taxes -- much less increase it and reduce the federal deficit -- it just isn’t possible to both cut rates as deeply as Romney wants and to put a high ceiling on deductions. Advertisement -- Estate taxes and the alternative minimum tax. If Romney has his way, he will scuttle them both. Obama hasn’t said where they’d fit into tax reform, but he favors a lower exemption and higher rates than the current estate tax has and a higher threshold for the alternative minimum tax so middle-incomers aren’t hit. -- Business taxes. Though both candidates want to cut the top corporate income tax rate, Obama would set it at 28% and Romney, at 25%. Romney also wants to deep-six the current corporate minimum tax. -- The research & development credit. Both men favor making the current R&D credit permanent -- The domestic production credit for businesses. Obama proposes to raise the current 9% domestic production deduction to 10.7% for manufacturers and even higher for those that use advanced processes. But non-manufacturing companies would lose the credit. Romney hasn’t offered any specifics on what he’d like to see happen on corporate taxes, other than the rate cut. Advertisement -- Small business breaks. Under Obama’s plan, small firms would be able to expense up to $1 million a year in asset purchases, and the $5-million ceiling on using the cash method of accounting would be doubled. -- Income from foreign subsidiaries. Romney wants to shift to a territory-based system, so that only income earned on U.S. soil would be taxed. Corporations would be free to return income to the U.S. from foreign subsidiaries without paying taxes on it. Obama, on the other hand, wants to impose a minimum tax on income earned abroad, whether the profits are repatriated or not. -- Other business breaks. The president takes aim at several other business tax easings, proposing to eliminate, for example, the use of two accounting practices: last-in, first-out inventory and the lower-of-cost-or-market method. Both of these can reduce a corporation’s tax bill. He’d also limit the deductibility of interest on corporate debt and would lengthen the depreciation schedules for many assets. Though Romney hasn’t detailed which business breaks he would put on the chopping block, he has said that cuts would be made to offset the tax rate reduction he proposes.