Ever since the election of Ronald Reagan in 1980, it has become commonplace for presidential candidates to promise to implement various “tax cuts” if elected. Although neither incumbent Barack Obama nor former Massachusetts governor Mitt Romney have bucked this trend, there are important differences in the tax proposals that they have made during the current election cycle.
Romney has presented the outlines of a tax program that would appear to offer considerable benefit to high-income earners. As part of a pledge to slash all tax rates by 20 percent, Romney would see the current top tax rate of 35 percent (assessed on income over $388,351 for individuals and married couples filing jointly, and $194,176 for married individuals filing separately) reduced to 28 percent. He intends to completely eliminate the tax on capital gains and dividends for individuals earning less than $200,000, while also repealing the Alternative Minimum Tax (AMT) and the estate tax and lowering the corporate tax rate from 35 percent to 25 percent. Romney's most radical position is his stated desire to see the 3.8 percent investment income surtax—which provides a partial means of funding Obamacare—repealed, along with Obamacare itself.
Romney’s position on other tax issues is not entirely clear, however. While he has stated that he favors reducing “tax breaks” for high-income earners, he has not yet specified which tax breaks will be cut. Moreover, the selection of influential Congressman Paul Ryan as his running mate is an indication that his tax positions may become yet more favorable to high-income earners. In Ryan’s proposed federal budget for FY 2013, the top tax rate is slashed to 25 percent, three percentage points lower than in Romney’s proposal. Ryan’s budget would also significantly limit the ability of the IRS to tax US corporate profits that are earned abroad.
President Barack Obama’s suggested changes to tax policy are less advantageous for high-income earners. He intends to raise the top two tax rates from 33 and 35 percent to 36 and 39.6--a move that would cost taxpayers in these brackets thousands of dollars--while keeping all other rates at current levels. He also hopes to raise the alternative minimum tax, assessing a rate of at least 30 percent on all households earning over $1 million dollars, and raising the estate tax to 45 percent for each dollar above a $3.5 million exemption (up from a 35-percent rate applied to each dollar above a $5 million exemption). Obama favors an increase in taxes on capital gains from 15 to 20 percent, as well as the taxation of “carried interest” by private financiers (currently taxed at 15 percent) taxed as ordinary income. He does, however, favor lowering the corporate income tax rate to 28 percent, while also offering a tax credit for companies relocating their operations to the U.S. Many of Obama’s programs that would benefit low-income earners are already in place, including a Special Direct Consolidation Program established for Federal Student Loans, a series of tax cuts for middle-income earners, the continuation of the Bush-era and the extremely complicated Public Service Loan Forgiveness Program (an initiative that, barring Congressional repeal, will vest no earlier than 2017), and the expansive, tax code-linked Obamacare medical reforms.
Regardless of the outcome of the election or your current earnings level, it appears that the tax picture for 2013 and beyond will be quite different than it is today. For a free consultation regarding the tax opportunities that may be available to you, please contact The Law Offices of Aaron P. Richter, a Seattle-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.