How will Obama tax plans work in this economy?
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/05/BUS013URIE.DTL&tsp=1
Kathleen Pender
Thursday, November 6, 2008
On the campaign trail, Barack Obama proposed more than a dozen tax changes that would affect individuals. The net effect would be to raise taxes on higher-income people and reduce them for low- and middle-income ones.
Most of the ideas were floated before credit markets froze and the economy faltered. By the time the Obamas and their new puppy settle into the White House, things could be even worse.Pundits say this could force Obama to shelve his tax plans while he focuses on the economy.
"Most of his tax proposals will be deferred because they don't have a stimulus effect and some of them will make the economy worse," says Roberton Williams, principal research associate with the nonpartisan Tax Policy Center.
The centerpiece of Obama's tax plan is the Making Work Pay Credit. It would give workers making up to $75,000 per year a credit equal to 6.2 percent of their first $8,100 in annual earnings.
The credit, worth about $500 per year, would essentially refund what eligible workers paid in Social Security tax. Couples earning up to $150,000 a year could get up to $1,000 if both work.
The credit would not stimulate the economy because it "rewards people for what they have already done. Those people are already working," Williams says.
Like other proposed tax cuts, the credit would provide no immediate stimulus because people would not get the benefit until they file their 2009 taxes in 2010, unless it was sent out in an advance refund check - a tactic used in the Bush administration.
For high-income people, Obama planned to restore the top two rates in effect during the Clinton era - 36 and 39.6 percent. Today the top rate is 35 percent.This increase would affect people whose taxable income exceeds about $165,000 (single) or $200,000 (married filing jointly). (Taxable income is the amount you pay taxes on; it is less than gross income.)
Obama would also increase the capital gains and dividend tax for this same group of people to 20 percent from 15 percent.
Clint Stretch, managing principal for tax policy with Deloitte & Touche, estimates that
a family of four with $500,000 in income from wages, interest and capital gains would pay an extra $3,100 in taxes under the Obama plan.
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Obama tax proposals' effect on individuals
Permanent changes Income tax: Restore Clinton-era tax rates for high-income earners. The marginal tax rate on taxable income exceeding $357,700 (for singles and married couples filing jointly) would rise to 39.6 percent from 35 percent. The rate on taxable income between $200,300 and $357,700 (for joint filers) and between $164,550 and $357,700 (for singles) would rise to 36 percent from 33 percent.
Capital gains: Raise tax rate on long-term capital gains and qualified dividends to 20 percent from 15 percent for people with taxable income exceeding $164,550 (singles) or $200,300 (joint returns).
Restore phaseouts: Reinstate the phaseout of personal exemptions and itemized deductions for higher-income taxpayers. The phaseout is scheduled to end in 2010.
Making Work Pay Credit: Create a tax credit equal to 6.2 percent of the first $8,100 of annual earnings for workers making less than $75,000 per year. This credit, worth up to $500 per person, would refund the eligible employee's Social Security tax.
Seniors: Eliminate income tax for seniors earning less than $50,000.
Mortgages: Give homeowners who don't itemize deductions a new credit ($800 maximum) equal to 10 percent of their annual mortgage payments.
College: Replace the Hope credit (maximum $1,800) with the American Opportunity Tax Credit (maximum $4,000). Applies to qualified expenses paid the first two years of college. Income limits apply.
Child care: Increase the credit for low-income families and make it available to workers who don't earn enough to pay income tax.
Earned income tax credit: Expand this credit for low-income workers.
Alternative Minimum Tax: Make the 2008 AMT exemption amount permanent and index it to inflation. This would prevent a big increase in the number of people who pay AMT. Some high-income people would pay less AMT because they would pay more regular tax.
Estate tax: Make the 2009 rules permanent - no tax on estates less than $3.5 million per person or $7 million per couple. Amounts over that limit taxed at 45 percent.
Temporary changes
Retirement plans: Workers could withdraw 15 percent (up to $10,000) of their IRA or 401(k) account without paying a penalty in 2008 and 2009. Income tax would still apply. Retirees older than 70 1/2 would not have to take withdrawals from their tax-deferred retirement plans in 2008 or 2009.
Unemployment benefits: No tax on unemployment benefits in 2008 and 2009.
Sources: Deloitte & Touche, Tax Policy Center
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