A Familiar Call For Change.

Tax

A familiar call for change. Tax platforms of the presidential candidates September 2008

A familiar call for change Tax platforms of the presidential candidates

With the campaign for the White House now in full stride, Republican presidential nominee Sen. John McCain of Arizona and Democratic nominee Sen. Barack Obama of Illinois are positioning themselves as candidates who will change the way Washington works. But while each has indicated that changing the tax code will play a key role in advancing his agenda, it is not readily apparent that either one intends to advance significant tax reforms during his first 100 days or even his first year in office. Three modern presidents have come into office with fully developed tax plans at the center of their campaigns that they then advanced early in their respective administrations: Ronald Reagan in 1981, Bill Clinton in 1993, and George W. Bush in 2001. In contrast, McCain and Obama have not moved immediate action on taxes to the very forefront of their campaigns. Thus far, they have addressed tax policy only in broad strokes: the tax proposals they discuss in their speeches and position papers are often lacking in technical details and have been modified throughout the campaign. Moreover, both camps are discussing health care and energy with at least equal fervor, which suggests that broad-based tax proposals may not lead the agenda next year no matter who wins the election. Indeed, we may not see any fully fleshed-out proposals until after the election is over and the new elected president sends his first tax and spending package to Congress next February. That said, a number of factors should drive the next president as well as the next Congress to address taxes in the coming two years: • First, nearly all of the 2001 and 2003 tax cuts will expire at the end of 2010, leaving decisionmakers with the choice of extending part or all of those tax cuts or allowing them to lapse. (See the table that follows this report for a list of expiring provisions.) • Second, the individual alternative minimum tax (AMT) will continue to capture millions of taxpayers and force them into a system that was originally implemented to ensure that only the wealthiest taxpayers did not escape tax liability. • Third, the estate tax will drop to a rate of zero effective for 2010, but return to pre-2001 rates of up to 55 percent with a $1 million exemption in 2011 if not reformed in some manner. • Finally, if the tax law is extended to preserve the rules that existed in 2007, projected budget deficits over the next 10 years would exceed $7.2 trillion (according to Congressional Budget Office estimates). Projected spending increases on Social Security, Medicare, and Medicaid due to the retirement of the Baby Boom generation also will strain the revenue sources of the federal government for years to come. With all this in mind, even though we cannot predict who will occupy the White House in 2009 or exactly where tax policy will fit into the next president’s agenda, it is still possible to offer some insights on significant tax proposals that could come out of a McCain or an Obama administration and how they might be received in Congress.



A familiar call for change Tax platforms of the presidential candidates

The sources for our analysis This document relies on a variety of sources, including the McCain and Obama campaign Web sites and analyses from the Congressional Budget Office and congressional Joint Committee on Taxation. We also have relied heavily on extensive reporting on, and analysis by, the nonpartisan Tax Policy Center, which published “An Updated Analysis of the 2008 Presidential Candidates’ Tax Plans.” The most current version of the analysis is available at www.taxpolicycenter.org. We relied on the September 12, 2008, update.

Following party orthodoxies Both McCain and Obama have definite ideas on the direction in which they would take the income tax system. But despite their emphasis on change, their proposals as articulated thus far in the campaign reflect the very traditional debate over how progressive the tax system should be — that is, how the burden should be distributed between the middle class and the wealthy. McCain’s tax plan would take an orthodox Republican approach by maintaining the 2001 and 2003 Bush tax cuts, increasing the estate tax exemption while decreasing the tax rate, increasing the personal dependent exemption for individual taxpayers, and lowering corporate tax rates. McCain also has stated that he will oppose any new taxes as a means to fund his proposals. This robust plan represents a significant commitment to slashing government spending if deficits are to be controlled. According to an analysis by the nonpartisan Tax Policy Center (TPC), the McCain tax plan would result in federal revenues equal to 17.6 percent of gross domestic product (GDP). For the 2007 through 2009 fiscal years, revenues are projected to average 18.4 percent of GDP and spending 20.8 percent. Obama follows Democratic orthodoxy by proposing higher taxes on the wealthy (which his campaign defines as joint filers with annual incomes above $250,000 and single filers with incomes above $200,000) to pay for tax cuts and benefits for the lower and middle classes. Like the McCain plan, Obama’s tax plan seems to imply a commitment to significant spending reductions. According to the TPC analysis, the Obama tax plan would result in federal revenues equal to 18.2 percent of GDP. Both candidates are committed, in general terms, to closing largely unspecified business and other perceived loopholes. Interestingly, neither is calling for a wholesale replacement of the current income tax system or the enactment of a new additional tax, such as a national retail sales tax or a value-added tax.

Is fundamental tax reform on the horizon? Neither candidate is discussing proposals to fundamentally reform or replace the current tax system. McCain, however, has suggested allowing individuals to determine their taxes under an optional alternative two-rate tax system with a generous standard deduction and increased personal exemption. Obama offers to provide standard-deduction filers with prefilled-in tax forms that they can verify and submit. In the past, tax reform has occurred after a substantial period of consensus building about the kinds of tax to impose and the level of revenue that is required. We do not see such an emerging consensus. Reform likely cannot become a reality until Congress and a president begin to agree on how to deal with the rapid growth of entitlement spending and other issues.

The big picture The McCain and Obama tax plans can be analyzed in three large pieces: individual income tax proposals, estate tax proposals, and business income tax proposals. With respect to individual income taxes, both candidates would reduce collections below the aggregate amounts collected under present law, but they would do so very differently. McCain would make virtually all of the Bush tax cuts permanent and extend further tax relief to families with children or other dependents. In the aggregate, Obama would, based on TPC numbers, collect less in individual income taxes than McCain, but he would do so by raising taxes on joint filers earning more than $250,000 and individuals earning more than $200,000 while preserving the Bush tax cuts for taxpayers falling below that income level and adding an array of specially targeted tax incentives and refundable tax-relief provisions. Both candidates would create an estate tax system that exempts all but a tiny fraction of estates from tax. Taxable estates would face very different burdens due to a lower exemption and higher tax rate on the remaining value. Over a 10-year period, estate tax collections under the Obama plan would exceed collections under the McCain plan by about $300 billion. In terms of total revenue collections, the most dramatic difference between the two candidates may be in their treatment of corporate taxes. McCain would provide a significant net reduction in corporate tax burdens through a reduced corporate tax rate, but would offset some of that reduction through the elimination of “corporate welfare” provisions in the tax code. Obama has expressed support for lowering the corporate rate as well, but proposes to raise significantly higher revenue through specific revenue offsets and other unidentified “loophole” closers.



A familiar call for change Tax platforms of the presidential candidates

The key question: Who should pay? The focus of the policy disagreement between McCain and Obama is less on the question of how much individual income tax the government should collect and more on who should pay that tax. McCain generally would hold the line on individual taxes. Obama would raise them on the highestincome taxpayers and cut taxes for college students, wage earners, and senior citizens. These differences in approach will shape tax policy in the next administration long after the sound bites of the campaigns have been forgotten.

Individual tax proposals Upper-income taxpayers have the most to gain under McCain’s plan and the most to lose under Obama’s. Both candidates have pledged to maintain the Bush tax cuts for middle- and low-income individuals. However, McCain would go one step further than Obama by keeping the top individual tax rate of 35 percent and keeping the top rate on capital gains and qualified dividends at 15 percent. Obama has indicated that he would reinstate the top two individual income tax rates at their pre-2001 levels — 39.6 and 36 percent — and increase the capital gains rate to 20 percent for taxpayers in those same tax brackets. His campaign advisers have also indicated that the dividend rate would continue to be tied to the capital gains rate (as it is now). Obama also would: • Reinstate the personal exemption phaseout and itemized deduction limitation, which are scheduled to be fully phased out starting in 2010 (phaseout thresholds would be $250,000 for joint filers and $200,000 for others). In effect, the Obama plan would raise the top income tax rate, considering these phaseouts, to 40.79 percent from its 2008 level of 35.35 percent. • Eliminate all income taxes on senior citizens earning below $50,000. • Provide a “Making Work Pay” tax credit for individuals earning below $75,000 a year.

Estate tax proposals compared As reported in The Wall Street Journal, Deloitte has calculated the federal estate tax under the McCain and Obama plans for hypothetical estates of $5 million and $10 million. A $5 million estate would pay a tax of $675,000 under the Obama plan, but nothing under McCain’s plan. For a $10 million estate, the McCain plan would result in a $2.2 million savings compared to the Obama plan.

Payroll taxes and Social Security solvency Most would agree that Social Security’s long-term fiscal stability must be addressed. Agreement on how to do that will be difficult to find. Some see options such as increasing payroll taxes or means-testing benefits as changing Social Security from an insurance program to a welfare program or as unfairly shifting the cost of Social Security to high-income individuals who already bear a heavier income tax burden. Others believe that extending retirement ages or reducing inflation adjustments will disproportionately hurt poorer workers. Still others fear that privatization options would endanger the system’s solvency.

Estate tax — Since the estate tax is currently scheduled to be repealed for one year during 2010 and then revert to pre-Bush rates and exemption levels in 2011, many expect that Congress will address estate tax reform next year. Both McCain and Obama have proposed adopting a reformed permanent estate tax system. McCain has proposed a 15 percent estate tax on the roughly 0.2 percent of estates valued at more than $5 million ($10 million per couple). Obama would make permanent the 2009 estate tax structure, which taxes the roughly 0.3 percent of estates valued above $3.5 million per person ($7 million per couple) at rates ranging from 18 to 45 percent. AMT — At last count, the government estimated that about 4 million individual taxpayers owed the AMT for 2007, and even more had to at least determine that they did not owe it. While 4 million is still a relatively small number compared to the entire population of roughly 140 million individual taxpayers in 2007, it is not when compared to the 140,000 taxpayers who owed AMT in 1987. Moreover, statistics on the number of taxpayers with AMT liability are misleading, because in recent years Congress has approved an annual fix or “patch” — in the form of a one-year increase in the AMT exemption amounts — to keep the AMT in check. The most recent patch Congress adopted — for 2007 — has already expired. If Congress fails to adopt another patch for 2008, the number of AMT taxpayers will balloon to more than 24 million. Proposals to eliminate the AMT are politically popular but prohibitively expensive. Thus, both candidates call for simply keeping the AMT in check by extending the 2007 AMT patch and indexing it for inflation. Social Security payroll tax increase — Although the need for Social Security reform is often discussed, long-term solutions are not apparent. After 2017, Social Security expenditures are expected to exceed employer and employee payroll tax collections. Add to this the fact that by 2025, 31 percent of U.S. adults will be at or above retirement age, and it becomes clear that preservation of the Social Security trust fund surplus and future solvency of the system are at risk. To address these long-term needs, Obama has said that he would propose an additional payroll tax to take effect 10 years or more in the future. This tax would be at a rate of between 2 and 4 percent (split between employer and employee) and would apply to income above $250,000. McCain has not proposed a payroll tax increase.

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.



A familiar call for change Tax platforms of the presidential candidates

Business revenue raisers: Not-so-easy money Both candidates’ tax plans depend heavily on raising revenue from “corporate welfare” and similar measures. Congress and various administrations have targeted these kinds of initiatives in numerous pieces of legislation, including the 1981, 1986, and 1993 tax acts, and in meeting pay-as-you-go budget requirements over the last decade. We have assembled a list of the most significant current business-related tax increase proposals in a table that follows this report. For the incoming administration, the hard reality will be that many of these proposals have not been enacted in the past because they are highly controversial and could have a significant impact on business. In addition, even if somehow all of these were to be enacted, the revenue gained still could well fall short of the targets set by the campaigns.

Business tax proposals The U.S. corporate tax rate of 35 percent — 39 percent when including state and local corporate income taxes — is second only to Japan among the 30 members of the Organisation for Economic Co-operation and Development (OECD) and well above the nearly 27 percent average corporate income tax rate of OECD member nations. The trend toward lower corporate tax rates internationally has fueled arguments here that a corporate rate reduction is essential to keeping the United States competitive in the global marketplace. To that end, the two candidates have discussed in broad terms their desire to lower the corporate rate. McCain has pledged to gradually reduce this rate to 25 percent by 2015, implement immediate expensing for three- and five-year property through 2013, and enact a permanent research and development (R&D) credit calculated on the basis of wages spent on R&D. McCain’s corporate tax rate reduction would be paid for in part by repealing the Section 199 deduction for qualified production activities; eliminating certain oil and gas tax incentives; and by additional, largely unspecified proposals to eliminate “corporate welfare” that would raise $30 billion a year in revenue. Taken together, the McCain proposals, according to TPC numbers, would reduce taxes on corporations by $450 billion over 10 years. Obama has not provided as much detail regarding his business tax reform plan. He has called for the corporate tax rate to be lowered for companies that expand or start operations domestically, but has not specified an exact rate or the manner in which such reductions would be financed. He has proposed permanent extension of the R&D and renewable energy credits. Additionally, he has indicated that he would eliminate all capital gains taxes on smallbusiness investments and for start-ups. Obama has also called for increasing taxes through $76 billion a year of “revenue raisers” such as eliminating oil and gas tax incentives, requiring information reporting on securities transactions, codifying the economic substance doctrine, modifying Subpart F deferral to “end incentives for companies to ship jobs overseas,” closing the “offshore pension loophole,” taxing publicly traded partnerships as C corporations, taxing carried interests as ordinary income, and closing loopholes in “corporate tax deductibility of CEO pay.” The net effect of these policies according to TPC numbers is an increase in business-related taxes of $770 billion.

Income tax system’s role in health care reform The federal income tax treatment of health care-related savings and benefits is one of the most significant differences between present law and a theoretically “ideal” or “comprehensive” income tax system. Any consideration of health care reform plans that seek to reduce the number of uninsured individuals likely will trigger a debate over whether, or the extent to which, the income tax system should be used to influence health care and health insurance choices.

Health care tax proposals McCain opposes federally mandated health insurance coverage, favoring a plan to eliminate a perceived bias created by employer-provided health insurance deductions. Specifically, McCain would offer every taxpayer a $2,500 credit ($5,000 for families) to be used toward the purchase of health insurance. Those currently enrolled in coverage through their employer could elect to forfeit their exclusion and take the credit or continue under their employer’s plan. Although Obama is not in favor of universal health coverage, he does want all children to be covered. As part of financing this plan, he would require employers that do not offer or make a meaningful contribution to the cost of health care for their employees to contribute a percentage of payroll toward the costs of the national plan. Small businesses would be exempt from this requirement and would receive a new Small Business Health Tax Credit intended to reduce their health care costs.



A familiar call for change Tax platforms of the presidential candidates

Dealing with uncertainty Retroactive tax changes Both candidates are proposing at least some tax increases. That reality leads inevitably to two questions: “When?” and “Could those changes be retroactive?” Constitutionally, Congress could pass legislation in 2009 or 2010 and make it apply to the entire year. It has done so in the past — for example, with the rate increase in 1993. But politically, retroactive changes are often viewed as unfair. Retroactivity generally is limited to two circumstances. The first is when Congress can reasonably conclude that taxpayers were aware that the increase was coming because it was widely discussed in campaigns or official discussions. The second is when taxpayers have engaged in conduct that Congress sees as abusive. In these cases, fairness is found in retroactivity on the grounds that the taxpayer “should have known better.” Capital gains rates Capital gains rates could be raised from 15 percent to 20 percent next year. If they are not, the same risk may exist for 2010 or 2011. Some have suggested that taxpayers should sell gain assets to lock in capital gains at the lower rate. Investors will want to weigh both the tax and economic considerations involved in such a decision. If the asset does not fit an individual’s investment needs, then selling will make sense apart from the tax considerations. But if the asset would simply be repurchased or replaced with a similar investment, then three factors will affect the decision. The first is transaction costs. It would not make sense, for example, to incur a 6 percent commission to save a 5 percent tax. The second is the amount of gain relative to the asset’s value. As a general rule, locking in gains and paying tax early is more likely to make sense for assets with low basis. The third is the loss of earnings on the funds used to pay tax.

Possible vehicles for tax law changes in the next administration Although the next president is unlikely to come into office with a comprehensive tax plan as an immediate legislative priority, a number of triggers could turn the country’s attention to taxes and tax policy in the first two years of the next administration. Economic stimulus — The state of the nation’s economy has held the center of the political stage for most of 2008. If the economy continues to struggle at the beginning of the next administration and Congress, then Washington may once again turn to proposals for economic stimulus. This could prompt early consideration of various tax measures that are seen as stimulative, ranging from targeted investment incentives to broader-based, but temporary, tax reductions. Such a discussion could also lead to early consideration of either delayed or compliance-related revenue offsets that would mitigate the long-term impact of further tax reductions. By its nature, however, the rapid consideration of a further stimulus bill would create little opportunity for the discussion of entirely new or more dramatic changes in tax law. Moreover, economic stimulus legislation could take a different form in 2009 than it did in 2008, focusing less on tax rebates and incentives and more on infrastructure, relief to states, and expansion of unemployment benefits. Energy — High gasoline prices, increased heating and cooling bills, and mounting calls for offshore drilling have turned energy policy into a high priority for lawmakers. If the current Congress leaves Washington to hit the campaign trail without taking action on key energy issues, including extension of popular alternative energy tax incentives, then the next Congress is likely to take up energy early in 2009. As has been the case in 2008, extending or expanding energy tax incentives will bring with it a discussion of tax increases in some industry sectors and of other potential revenue offsets. Expiration of Bush tax cuts — The looming expiration of the Bush tax cuts after 2010 would seem to portend an automatic tax increase, but as evidenced by proposals coming out of the McCain and Obama campaigns, it is likely that a substantial portion of those cuts will survive into the next decade. A political consensus appears to support continuation of the Bush tax cuts for the middle class. Even with respect to high-income individuals, few would support a top tax rate significantly above the roughly 40 percent that was in place before the Bush cuts became law. In the context of extending the tax cuts, Democrats can be expected to offer a wide array of changes that would increase taxes on high-income taxpayers while cutting taxes on families, students, and other targeted groups. AMT reform — The current individual AMT system is unsustainable and, if left unreformed, would rapidly become the tax base for the vast majority of middle-class taxpayers over the next decade. The Joint Committee on Taxation estimates that by 2010 more than 85 percent of taxpayers with incomes of $100,000, but less than $200,000, would pay AMT. Unfortunately, the cost of repealing the AMT would be prohibitive: a TPC analysis estimates $1.8 trillion over 10 years, assuming extension of the Bush tax cuts. The AMT will have to be dealt with either in the context of extending the Bush tax cuts or, in the short term, through further stopgap relief. Entitlement reform — The aging of the Baby Boom generation will put an increasing strain on the Social Security and Medicare programs. That fact, plus mounting federal debt and an ever-expanding federal bureaucracy, could compel significant tax and entitlement reforms during the next administration. Most observers believe that, as with past efforts to address chronic budget shortfalls, the solution will require a combination of spending and tax actions.



A familiar call for change Tax platforms of the presidential candidates

Dealing with uncertainty

Prospects for action

Deferred compensation High-income taxpayers concerned with the risk that top individual tax rates may increase for 2009 or 2010 will want to consider whether they should accelerate recognition of deferred compensation.

If Obama is sworn in as president in 2009 and immediately moves forward with his health care initiative as promised, there is a real possibility that major tax legislation will be delayed into 2010 or even 2011. That does not take tax entirely off the table, however, since Congress and the next president will be looking at more than $60 billion to extend expiring tax provisions benefiting individuals and businesses as well as the annual AMT patch that will cost a projected $65 billion to $70 billion a year to maintain.

The economic analysis of whether to accelerate deferred compensation may be easier than the analysis involved in evaluating capital gains. In many cases, a taxpayer will incur little or no transaction costs in accelerating compensation and all of the compensation is taxable. In addition, once compensation is realized, the after-tax earnings can be invested in alternatives that may generate capital gains or other taxfavored income. Of course, the available rates of return inside the compensation plan and on alternative investments outside the plan must be considered, as well as nontax factors. A note of caution: If accelerating compensation will not generate additional cash, then the cost of using alternative cash resources to pay the additional tax must be considered. Additionally, any analysis of accelerating deferred compensation must also take into account existing tax rules that impose an additional income tax of 20 percent (or more) on certain impermissible changes in the timing of compensation payments.

Whether, and the extent to which, a Democratic Congress might act on business tax issues will depend on many factors. Most important, if the economy and markets continue in turmoil, a number of members may be reluctant to chance any action that could be seen as prolonging a downturn. For his part, Obama has indicated that if the economy continues to slump into next year, he would not move to increase taxes early in his administration. If the task of fashioning tax policy falls to McCain working with a Congress that most believe will not be terribly different from the current one, then prospects for business taxpayers will have improved, but they will nonetheless need to remain vigilant. A Democratic House would continue to advance a range of revenue-raising options, and McCain has already indicated that he would raise in excess of $30 billion a year from unidentified business tax provisions in the context of cutting corporate tax rates. One can imagine scenarios in which a McCain White House, anxious to extend the Bush tax cuts, would eventually cut a deal on taxes that includes provisions adverse to specific business interests.



A familiar call for change Tax platforms of the presidential candidates

Dealing with uncertainty Retirement savings Taxpayers sometimes wonder whether they should skip making retirement plan contributions when it appears that tax rates will be rising. A decision to forego contributions to a qualified retirement plan should never be made lightly. Sound retirement planning involves a range of economic and tax considerations, but most important, it involves consistent discipline to save. Contributions to qualified retirement plans, such as IRAs, Roth IRAs, 401(k)s, and profit sharing plans, are subject to annual limitations. This means that a skipped contribution cannot be made later and the potential for tax-favored earning on that amount is lost. In a traditional IRA, 401(k), or profit sharing plan, the economic benefit of accruing tax-exempt earnings on contributions over the long term will typically outweigh higher tax benefits that might be in place when withdrawals are made. For 401(k)s with a matching feature, the advantage of an employer contribution adds further value.

Bottom line: both come up short A combination of tax cuts, a faltering economy, and two overseas wars have erased the budget surplus inherited by the Bush administration in 2001. Testimony from budget experts has made it clear that a policy that maintains the Bush tax cuts but does little to change federal spending will be unsustainable. Yet both McCain and Obama would maintain individual income tax receipts at levels comparable to those reached under President Bush’s policy. McCain’s tax plan seems to add to the challenge by proposing net cuts in corporate tax collections, while the Obama plan calls for significant, but potentially unrealistic, business tax increases. One thing is clear: neither candidate is planning to address our looming fiscal crisis by asking for net tax increases. In the short term at least, the promise will be, as it has been, that we will control spending. It also means that whenever a new tax cut or spending priority is identified within a constrained federal budget, both the new administration and the new Congress will be tempted to turn their gaze toward high-income and high-net-worth individuals and businesses as likely sources for revenue offsets. It is also wise to consider that neither candidate will get all that he wants in the tax arena. As is the case when any president offers a proposal, Congress holds the legislative pen and thus has significant influence in shaping that which is enacted into law. In the past, even presidents working with their own party in Congress have found their tax plans reshaped by concerns that members have for the impact of proposals on constituents and by the necessity of forging sufficiently broad support in the Senate to avoid procedural roadblocks.

A distribution would have to be taxed at a significantly higher rate upon withdrawal at retirement for the benefit created by earning tax-exempt income in a tax-deferred account over the long term to be eliminated. Also, many taxpayers can expect to be in a lower tax bracket in retirement even if top rates are raised. With respect to Roth IRAs, contributions are made with after-tax income and the distributions received after retirement are tax free. This means that any future tax rate changes should not affect the value of the account. Business tax changes Businesses may face the most difficulty in dealing with the tax uncertainty that will come with a new administration. This difficulty stems from two sources. First, both candidates have committed to substantial and sometimes yet-to-beidentified revenue raisers that will affect business. Second, revenue raisers do not need to await a major tax bill. They could arise early in 2009 as revenue offsets for other legislation. Businesses will need to focus on what is happening in Washington so that they can effectively manage the risks and opportunities that arise when tax laws change. That includes observing the entire legislative process to ensure that new tax law changes do not unnecessarily catch businesses by surprise.



A familiar call for change Tax platforms of the presidential candidates

Tax policy scorecard: How the presidential candidates stack up John McCain

Barack Obama

Business tax incentives1 • Phase down corporate tax rate from 35 to 25 percent over six years by 2015 (30 percent in 2010–2011, 28 percent in 2012–2013, 26 percent in 2014, and 25 percent thereafter) • Make R&D tax credit permanent and equal to 10 percent of wages spent on research and development • Allow first-year deduction of 3- and 5-year equipment purchases through 2013 (deny interest deductions for expensed equipment)

• Make R&D tax credit permanent • Lower corporate tax rate for companies that expand or start operations in the United States

Business-related revenue raisers2 • Raise $30 billion a year by “eliminating corporate welfare” • Repeal Section 199 domestic production activities deduction • Eliminate certain oil and gas tax incentives

• • • • •

• • • •

Raise $76 billion a year in largely unspecified revenue offsets Eliminate oil and gas tax incentives Require information reporting of securities transactions Codify the economic substance doctrine Reform international tax rules, including modifying Subpart F deferral to “end incentive for companies to ship jobs overseas” and closing the “offshore pension loophole” Establish an international tax haven “watch list” of countries that do not share information returns with the United States Tax publicly traded partnerships as C corporations Tax carried interest as ordinary income Close loopholes in “corporate tax deductibility of CEO pay”

Bush tax cuts • Make most of the 2001 and 2003 Bush tax cuts permanent (excluding estate tax repeal)

• Reinstate pre-2001 top individual tax rates of 39.6 and 36 percent for families making more than $250,000 ($200,000 for singles) • Make permanent certain Bush tax cuts, including $1,000 child credit; marriage penalty relief; and 10, 15, 25, and 28 percent individual tax rates • Restore PEP/Pease (personal exemption phaseout and itemized deduction limitation) phaseouts at an increased threshold of $250,000 for joint filers ($200,000 for singles). Index threshold amounts for inflation

Capital gains and dividends • Maintain current tax rate of 15 percent

• Raise capital gains and dividend rates to 20 percent for families earning more than $250,000 ($200,000 for singles) • Eliminate all capital gains taxes on start-ups and small businesses to encourage innovation



A familiar call for change Tax platforms of the presidential candidates

Tax policy scorecard: How the presidential candidates stack up continued

John McCain

Barack Obama

New individual tax cut proposals • Offer an alternative tax system with two rates, a generous standard deduction, and an increased personal exemption • Increase exemption amount for dependents to $7,000 (phased-in schedule of $500 each year from 2010 to 2016). Families with $50,000 or less in income could take full $7,000 exemption beginning in 2009

• Eliminate all income taxes for seniors (age 65 and over) earning less than $50,000 a year • Create a refundable “Making Work Pay Credit” equal to 6.2 percent of up to $8,100 in earnings for those making less than $75,000 a year (maximum $500 credit per spouse) • Create a refundable 10 percent “Universal Mortgage Credit” for nonitemizers (up to a maximum of $800) • Replace existing Hope credit with a refundable “American Opportunity Tax Credit,” providing up to $4,000 per year for qualifying higher education expenses • Expand the earned income tax credit program • Mandate automatic employee enrollment in 401(k) plans where employers offer retirement plans. Require employers that do not offer retirement plans to provide employees with access to automatic IRAs • Expand Savers Credit and make it refundable. For working families earning less than $75,000, government would match $500 of first $1,000 saved and deposit into account • Increase child care dependent maximum credit rate to 50 percent and increase phaseout threshold to $30,000 • Create an emergency energy rebate of $500 ($1,000 for families) to be funded by a windfall profits tax on oil companies • Provide taxpayers who take standard deduction prefilled tax forms to verify, sign, and return

Estate and gift tax • Increase exemption level to $5 million per person ($10 million per couple) and lower top rate to 15 percent

• Increase exemption level to $3.5 million per person ($7 million per couple) and increase top rate to 45 percent

Individual alternative minimum tax • Extend the 2007 AMT “patch” exemption levels and index for inflation3

• Extend and index 2007 patch4

Energy • Supports a $5,000 tax credit for purchase of a zero-emission vehicle (vehicles not currently available to general public)

• Make permanent the Section 45 renewable production tax credit • Impose windfall profits tax on oil and gas companies • Provide a $7,000 tax credit for purchase of advanced technology vehicles • Provide $4 billion in retooling tax credits and loan guarantees for domestic auto plants and parts manufacturers to produce new fuelefficient cars

Health care • Replace tax exclusion for employer-sponsored insurance with refundable credit of $2,500 for individuals ($5,000 per family) to purchase health insurance

• Provide a refundable tax credit to small businesses that provide health insurance to employees to claim up to 50 percent on premiums

Technology reform • Ban Internet taxation • Prohibit new cell phone taxes

• Provide true broadband to every community through new tax and loan incentives

Payroll tax • No proposal

• Retain existing payroll tax on first $102,000 of income (indexed for inflation). Exempt income from $102,000 to $250,000, then reinstate a 2 to 4 percent payroll tax (combined employee and employer) on income above $250,000. According to Obama, proposal would not take effect for at least 10 years

Information in this table reflects candidates’ positions as of September 15, 2008. Unless otherwise noted, all information is from McCain’s and Obama’s personal campaign Web sites. A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans, The Tax Policy Center, June 20, 2008. Ibid. 3 Ibid. 4 Ibid. 1 2



A familiar call for change Tax platforms of the presidential candidates

Revenue-raising options Both of the candidates have called for revenue raisers, many of which are largely unspecified, that could have a significant effect on business taxation. The table below shows the major revenue offsets that are either: • Pending in active House or Senate tax legislation (that is, vetted by the House Ways and Means Committee or considered on the Senate floor) or • Were included in (1) two corporate tax reform white papers issued by the Treasury Department in July and December 2007, (2) comprehensive tax reform legislation introduced by House Ways and Means Chairman Charles Rangel, or (3) President Bush’s FY 2009 budget submission to Congress. These provisions represent that which may be considered by the next president as ways to pay for their tax cut proposals. Provisions that are in bold have been proposed in some form by one or both of the candidates. Available corporate revenue raisers

Proposals

Active bill in House or Senate

Treasury corporate tax reform

Rangel tax reform

FY09 Bush budget package

General business Reduce the dividends-received deduction

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Repeal the R&D credit

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Repeal the Section 199 deduction

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Repeal the last-in, first out (LIFO) accounting method

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Repeal the “lower of cost or market” inventory valuation method

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Increase the amortization period for intangible assets to 20 years

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Repeal the low-income housing credit

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Repeal special source rules for inventory property

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Deny exclusion of interest on state and local bonds

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Deny exclusion of interest on life insurance savings

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International tax Deny deductions on unrepatriated controlled foreign corporation (CFC) income

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Deny deferral of income from CFCs

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Repeal or delay worldwide interest allocation election

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Limit treaty benefits on payments by foreign multinationals incorporated in tax havens

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Limit related-party interest deductions under Section 163(j)

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End Domestic International Sales Corporation (DISC) provisions

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General compliance Codification of the economic substance doctrine

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Require stock basis reporting by brokers on sales of securities

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Require information reporting on payments to corporations

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Increase information return penalties

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A familiar call for change Tax platforms of the presidential candidates

Continued Available corporate revenue raisers

Proposals

Active bill in House or Senate

Treasury corporate tax reform

Rangel tax reform

FY09 Bush budget package

Pass-through entities Treat S corporation and limited partnership employees in service businesses as receiving self-employment income

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Require hedge fund managers to recognize income from investment management services using offshore tax haven corporations as it accrues

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Tax publicly traded partnerships as corporations

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Tax income from carried interests as ordinary income

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Change employee stock ownership plan rules

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Energy Repeal Section 199 for oil and gas companies

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Repeal or modify oil and gas incentives:

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• Amortization of geological and geophysical (G&G) costs

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• 15-year natural gas distribution lines

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• 7-year natural gas gathering lines Oil- and gas-specific revenue raisers:

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• 13 percent excise tax imposed on: oil or gas extracted from the Outer Continental Shelf in the Gulf of Mexico, finished gasoline on its removal from the refinery or entry into the United States, and fuel removed by refineries and terminals in trade zones • Modify application of the foreign tax credit rules to foreign oil and gas extraction income (FOGEI) and foreign oil-related income (FORI)

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A familiar call for change Tax platforms of the presidential candidates

What happens to the Bush tax cuts after 2010? • Individual Tax Rate Reductions — The 10 percent bracket expires; the 25, 28, 33, and 35 percent brackets increase to 28, 31, 36, and 39.6 percent. Lower rates for long-term capital gains increase from 0 and 15 percent to 10 and 20 percent. Qualified dividend income is taxed as ordinary income, from 15 to 39.6 percent. • Itemized Deductions and Personal Exemptions — Phaseout of overall limitation on itemized deductions and phaseout of personal exemptions are restored. • Tax Benefits Relating to Children — Child tax credit drops from $1,000 to $500; extension of and increased credit for adoption expenses and increased exclusion for employerprovided adoption assistance lapses; and dependent care credit decreases due to lower caps for eligible expenses, lower maximum credit rate, and modified phasedown of credit. • Marriage Penalty Relief — Standard deduction for married couples filing a joint return drops from 200 percent of standard deduction for singles to 167 percent of standard deduction for singles. The 15 percent bracket breakpoint for married couples filing a joint return drops from 200 percent to 167 percent of same breakpoint for singles. Increased earned income tax credit for married couples expires. • Affordable Education — Range of direct tax and savings incentives, including increased contribution limits for education IRAs, expanded student loan interest deduction, and extension of employee exclusion for employer-provided educational assistance expires. • Estate Tax — Estate tax restored, with top tax rate of 55 percent and a unified credit exemption amount of $1 million; stepped-up basis regime reinstated. Note: This list summarizes the major provisions of the so-called “Bush tax cuts.” It is not intended to be comprehensive and omits some provisions originally enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that may have been addressed separately in later years. For example, the Pension Protection Act of 2006 made permanent all EGTRRA-related pension provisions, and Congress has repeatedly legislated changes to certain provisions through annual extensions of expired tax provisions.

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Contacts Clint Stretch Managing Principal, Tax Policy Deloitte Tax LLP +1 202 879 4935 [email protected] Jeff Kummer Director of Tax Policy Deloitte Tax LLP +1 202 220 2148 [email protected] www.deloitte.com/us/tax

Acknowledgments “A familiar call for change” was prepared by the Tax Policy Group of Deloitte Tax LLP in Washington, D.C., under the direction of Clint Stretch, managing principal, tax policy, and Jeff Kummer, director of tax policy. The text was prepared by: Donna Edwards, Tom Louthan, and Bart Massey, senior managers; Jon Almeras, Michael DeHoff, Michelle Johns, Kathy Loden, and Elizabeth Magin, managers; and Joel Deuth and Brendan Mahoney, tax consultants. This publication does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences arising from the reader’s particular situation.

Copyright © 2008 Deloitte Development LLC. All rights reserved.

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