What is better time to talk about tax plans than mid-April? More than ever, in this election year, the tax plans of the Republican Presidential Candidate—Mitt Romney—and the incumbent Democrat President Obama show such contrasts in their theories of taxation and economic growths.
1) Romney’s Tax Plans:
- Permanent across-the-board 20% cut in marginal rates. Effectively, the new tax rates will be: 8%, 12%, 20%, 22.4%, %26.4, and %28.
- Limit the value of deductions—especially for high income households—to cover for the cost of lower rates
- Maintain the current 15% tax rates on dividends and capital gains for households earning more than $200,000. For households earning less than that amount, there will be no tax on dividends and capital gains.
- Eliminate the Estate (Death) Tax and Alternative Minimum Tax
- Cut corporate tax rate to 25%
- Switch to a territorial tax system
- Strengthen and make permanent the R&D tax credit
- Repeal the corporate Alternative Minimum Tax (AMT)
Mitt Romney’s tax plans aim to reduce corporate tax rate in order to promote business growths—leading to job growths—along with reductions in individual tax rates to allow more consumer spending, leading to economic expansion. Romney believes that successful businesses will lead to higher wages to people.
By cutting individual tax rates 20% across all brackets, Romney allows small business owners to enjoy a lower individual tax rate as well—most of these business owners pay income tax at the individual level and will not be able to get the lower corporate tax otherwise.
The switch to a territorial tax system, which encourages companies to bring foreign profits back to the U.S. without being penalized by additional domestic tax, aiming to bring back an estimate of over $1 trillion parked overseas back to invest in the U.S.—leading to job growths in research & development, manufacturing (coupled with increasing wages in China) and construction.
2) Obama’s Tax Plans:
- Raise the top rate to 39.6% for households earning over $250,000. Keep current rates for others.
- Limit the value of deductions for households earning over $250,000 and end deductions for households earning over 1 million.
- Raise top tax rate on capital gains to 20%. And tax dividends as ordinary income for households earning $250,000 or more.
- Buffett rule: to set the alternate minimum tax rate of 30% for households earning over 1 million a year. This rule, if passed, will bring in additional tax revenue of $47 billion over the next 10 years.
- 2% Payroll tax cut: yearly extension will need to be passed by Congress for 2013. This tax cut is estimated to cost Social Security Trust Fund over 100 billion a year.
- Estate (Death) Tax: restores to the 2009 level, with a top rate of 45% on inheritances worth more than $3.5 million.
- Lower corporate tax rate to 28%—from current rate of 35%
- Cut corporate tax rate to 25% for “manufacturers”—the definition of “manufacturers” is unclear, therefore, it leads to potential lobby activity and new loop holes
- Close some current loop holes (6 out of 250)—but add 11 more loop holes
- Create new Earned Income Tax Credit for renewable energy companies—i.e. IRS will cut a check for unprofitable renewable energy companies even though these companies don’t pay taxes
President Obama’s tax plans mainly aim to increase taxes for the so-called rich people—as little as $250,000 household earning will put you in the category of rich people to be taxed at an increased rate of 39.6%.
Obama’s “Buffett Rule”—aiming to force people with over $1 million income paying at least 30% tax rate—only increase the tax revenue by a mere $47 billion in 10 years and will not help much in his annual deficit of over $1 trillion. Obama reasoned that the inequality gap between the 1% and the 99% has widened and he wants to tax the rich a fair share. Latest reports suggested that in 2010, while the rest of the people experienced a mere 0.2% increase, the top 1% on average saw their income rise over 11%—caused mainly by huge increases in executive pays, an example is the executive pay package of over $10 million for bailed-out AIG CEO approved by the administration’s “pay czar”. President Obama offered no explanation why raising taxes on the rich would help to narrow the gap between “1%” and “99%” or to increase the pay level for the “99%”. On the other hand, higher taxes on the so-called rich—many of which are small or mid-size business owners—may discourage investments and in turn slow down job growths in today’s high unemployment environment. His “Buffett Rule” is nothing more than a gimmick to divide people (“1%” versus “99%”) in order to conquer votes in an election year.
For the “99%”, President Obama is counting on Congress to annually extend his “2% payroll tax cut” which has been costing Social Security Tax Trust Fund over $100 billion a year—bankrupting the fund even sooner than projected.
President Obama’s lower corporation tax rate is not quite enough to bring investments back into the U.S. The new Earned Income Tax Credit opens up a new corporate welfare program—putting tax money into unprofitable renewable energy companies with no defined rules of when such companies should fold instead of continued operation.
3) Decisions, decisions, decisions:
Many may argue that the rich have more at stake this election year with huge difference in the tax plans of President Obama and Governor Romney—with the top 1% can save an average of $150,00 in taxes in Romney’s tax plans while they would pay about $83,000 more in Obama’s tax plans. However, I believe the “99%” group may be more at risk. I believe, those with millions to invest in business would have to think twice, when facing with the high taxes from Obama’s tax plans, on whether to invest the money fully, partially, or at all in the U.S. The alternatives for them would be investing most of their money overseas where taxes are much lower and some of the money in tax-free bonds—earning just enough for living expenses, for example. With no investments at home, economy will not expand and may even risk further contractions, leading to more job losses. Who will be hurt the most then? Raising taxes only help bringing more tax revenues for government to spend—the only issue is that government spending does not create sustainable job growths. Only private investments (into private sectors) can create sustainable jobs.
It’s time for each of us—voters—to think really hard before deciding who we vote for in November. When we listen to the debates between Governor Romney and President Obama, try to separate real issues from distractions, commitments from promises and blames from reasons.