Sure, we'd all like to see federal taxes cut. And with the presidential election just around the corner, now's your chance to cast your vote-not just for a candidate, but also for how you want this country's tax policy shaped.
Texas governor George W. Bush and Vice President Al Gore are both calling for reductions in taxes; however, the two have tax plans that vary in detail and scope. For the most part, the major differences stem from how the two candidates plan to spend future budget surpluses accumulated from outside the Social Security program. Bush wants Washington to distribute a large amount of those surpluses to taxpayers in the form of tax cuts. Gore, on the other hand, says he wants to pay down the debt and put the surpluses back into Social Security, as well as use them to help fortify Medicare.
Bush favors across-the-board income-tax cuts; Gore is in favor of more modest reductions that target specific areas, such as education and retirement savings. As far as small businesses are concerned, tax experts who've analyzed the two programs say Bush has offered a larger number of tax proposals in that area than Gore. "Vice President Gore's first approach through tax changes is going to be individual-based, allowing much more [personal] savings," says Mike Petrecca, a partner with PricewaterhouseCoopers in Columbus, Ohio.
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.
The Bush Plan
Bush has made taxes the centerpiece of his presidential campaign, pointing out that Americans now work more than four months per year on average to fund government at all levels. The Texas governor insists deep reductions are necessary to sustain the nation's record economic growth. He wants a $483 billion tax cut over five years, and as much as $1.2 trillion over 10 years. Under his plan, tax reductions would be financed exclusively out of the non-Social Security surplus.
Regarding Social Security, Bush supports legislation that would wall off the program's surplus from the rest of the budget. He has said he would reserve $2 trillion in excess Social Security revenues over the next decade to overhaul the retirement system. He says he'd also gradually reduce marginal income-tax rates, so taxpayers would receive an income-tax cut, and he would like to replace the current five-rate structure of 15, 28, 31, 36 and 39.6 percent with four lower rates of 10, 15, 25 and 33 percent.
In addition, Bush wants to provide marriage-penalty relief by allowing the lower-earning spouse of two-earner couples to deduct 10 percent of earnings up to $30,000, or a maximum deduction of $3,000. He would raise the threshold for phasing out the child tax credit from $110,000 to $200,000 for married couples and from $75,000 to $200,000 for single parents.
Bush says that his plan is geared toward helping lower- as well as middle-income people, especially families who are trying to get to the middle class. While his plan would help many people in the $20,000 income range, critics of his proposals claim that the large majority of tax cuts would go to the top 1 percent, or those earning more than $300,000 a year. He has also proposed extending the deduction for charitable contributions to some 80 million taxpayers who don't itemize. Under existing law, those who don't itemize on their tax returns are not able to take tax deductions for donations they make to charities and other nonprofit organizations.
In terms of education, Bush says he'd like to increase the existing annual contribution limit on savings accounts for education from $500 to $5,000 per child. Under current law, contributions are not deductible, but interest and dividends that build up are tax-free, and amounts withdrawn from the accounts under a certain set of circumstances aren't taxed.
As far as business is concerned, Bush supports an extension of the moratorium on Internet-sales taxation at least through 2006 and is opposed to taxes on Internet access. "This proposal would be a benefit for people in e-commerce," says Clint Stretch, director of tax policy for Deloitte & Touche in Washington, DC. Currently, a three-year moratorium is in place. A special commission set up by congress to devise a more uniform approach to taxing Internet sales recently called for a five year extension on the moratorium.
But there are drawbacks to continuing the moratorium for businesses not selling on the Internet, Stretch points out. "If you operate a brick-and-mortar establishment, a moratorium on Internet taxation is not all that helpful, because you're going to have sales-tax collection obligations in all the places where you have stores." In addition, he says, "Business would probably rather have a rational solution to this whole set of issues as opposed to just continuing with the moratorium."
That's not all that would benefit entrepreneurs: Bush would also like to make the research and development (R&D) tax credit a permanent part of the tax code. In addition, as a big plus for family business owners and very wealthy individuals, Bush proposes to phase out the federal estate tax by 2009. The effect of such a plan would allow all taxpayers, no matter how wealthy, to pass on their estates free of all federal taxes.
To date, Bush has yet to offer proposals that would reduce corporate taxes, says Stretch. But Bush has said he would veto any increase in corporate income-tax rates. At press time, he also has not yet offered proposals that would provide additional relief in capital-gains taxes, Stretch adds, which is a tax change a lot of entrepreneurs definitely want.
What Gore Wants
Where does Gore stand on taxes? Well, big tax reductions aren't a big part of his agenda-although he has said he would allocate $250 billion to $300 billion in tax cuts over the next decade by expanding tax incentives for education and retirement savings. One of his major proposals: To create so-called "life-long learning accounts." Under this plan, earnings invested in these accounts could be withdrawn and used tax-free if they go to pay for education or "qualified" lifelong learning.
To encourage greater savings for retirement, Gore wants to encourage the 70 million to 80 million Americans who currently don't have access to either Individual Retirement Accounts or 401(k)s to set up what he calls "USA Accounts."
Gore says that he would like to provide marriage-penalty relief by increasing the standard deduction so that married couples would be able to get the same standard deduction as if they remained single. Under his plan, the standard deduction would rise by $1,400 for married couples who claim it.
And as far as business taxes are concerned, the vice president is in support of the current moratorium on Internet-sales taxation, according to a Gore campaign aide. But the vice president has yet to state exactly how he'd deal with the Internet sales-tax issue once the moratorium expires. Gore also supports making the R&D tax credit permanent, but has also said the credit needs to be reformed, especially with respect to small businesses. He is of the belief that a partially refundable credit for small businesses represents a "sound investment."
In addition, it is likely that Gore will follow the lead of the Clinton administration's anti-tax-shelter, anti-loophole approach, says Stretch. Among the proposals that are being offered by Clinton is one to set up new disclosure requirements for any corporate tax transactions that might indicate some kind of sheltering. Clinton also has plans to increase penalties to 40 percent from 20 percent for substantially understating corporate taxes related to shelters.
Outlook In Congress
How these various proposals will actually fare once the results of the presidential election are known remains an open question. But that hasn't stopped tax analysts from speculating. For example, if Bush wins the election, he will have his work cut out for him. Trying to persuade Congress, especially one that may be controlled by Democrats, that large tax cuts are needed won't be easy. In the long run, Stretch believes much will depend on how the Bush tax plan is viewed by financial markets, pollsters and lawmakers. Says Stretch, "If everyone tells him the size of the cuts will put the stock market into a severe tailspin, he probably won't go for such a large tax cut."
On the other hand, if Gore is victorious-and if he faces a GOP-controlled Congress-compromise may indeed end up ruling the day. "A Congress dominated by Republicans may eventually accept some of Gore's tax proposals in order to win some of the GOP business tax-ideas, such as an extension of the moratorium placed on Internet sales taxes," says Petrecca. Stretch is in agreement that such a Congress is very likely to compromise with Gore and pass a smaller tax package than the GOP really wants to pass. "A small package would be far better than nothing at all," he adds.
In the meantime, the political give-and-take will most likely continue all the way up until the first Tuesday in November, when the voters will get to take it upon themselves to make the ultimate decision on just what kind of tax changes-not to mention president-they want.
- Deloitte & Touche, www.dtonline.com
- PricewaterhouseCoopers, 100 E. Broad St., Columbus, OH 43215, firstname.lastname@example.org.