Pragmatic Approach to Taxes Possible Next Year

Washington Matters

Pragmatic Approach to Taxes Possible Next Year

Barack Obama and John McCain are expected to shake up the electoral map this year. Each is already shaking up the conventional wisdom a bit on how they would handle tax policy. That may augur well for the big tax battles awaiting the next president and Congress.


Take estate tax reform. The next president won't be able to avoid dealing with this issue, because of the odd way the Bush tax cuts were implemented. Under current law, the estate tax will be eliminated in 2010, only to return in 2011 with a higher top rate -- 55% -- and lower exemption (the amount that's tax free) of $1 million. That compares with a $3.5 million exemption in effect in 2009.


You'd expect the Democrat to want to keep the estate tax in place and the Republican to call for permanent repeal. But McCain bucks his party's line on this one. Both he and Obama want to maintain the estate tax for the wealthiest estates. Obama and McCain have very different views on where to set the top rate, but they're pretty close on the exemption amount: $3.5 million for Obama versus $5 million for McCain. For most couples, the amount will be higher, even under Obama's plan, because the candidates favor a plan to let unused portions of the exemption be transferred to a surviving spouse.


On corporate taxes, meanwhile, there are hints that a President Obama would take a surprisingly pro-business stand, sounding more Republican than Democrat: By hiring an adviser, Jason Furman, who advocates a deep cut in the 35% top rate on corporate taxes, Obama gives the impression he'd put a corporate tax cut on the table, just as McCain has made clear he would. 


Together, these developments suggest whoever wins in November will be more pragmatic about tax policy. And pragmatism is going to be an important trait for the next president, considering the tax tsunami that's going to come rolling in over the next couple of years. During a McCain or Obama administration, the Bush tax cuts -- the 35% top income tax rate, the 15% top rate on capital gains, and a lot of others -- will expire. Plus Congress for several years has deferred finding a permanent solution to the growing reach of the alternative minimum tax, which threatens to hit middle income taxpayers it was never meant to catch. And all that's on top of that pesky estate tax problem.


The two candidates aren't complete tax mavericks, of course. It's no surprise, for example, that McCain supports and Obama rejects the idea of solving the health insurance crisis primarily by offering individuals tax credits to purchase coverage. And both follow their parties' lines on upper-income taxpayers: McCain would extend the Bush tax cuts for everyone, while Obama would end the largesse for taxpayers with incomes above $250,000.


But still...conventional wisdom would say that finding agreement on the Bush tax cuts, the AMT and estate taxes all at the same time is impossible. More legislative gridlock, for sure. But with both major party candidates already bucking conventional wisdom, it may be possible to bet on something getting done after all.