Next Up: Taxes

In this campaign, there's been a lot of talk about taxes, but it's really hard to get to the bottom of the candidates' actual intentions. I watched both conventions and heard Obama and McCain talk about their tax plans, but then when I went to their respective websites, I was unable to find details of what they had mentioned. So far, the best source of information that I've been able to find is the Tax Policy Center. "The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. The Center is made up of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government."

Tax is a subject that I hold near and dear, but I understand that most people's eyes tend to glaze over before they finish the first paragraph on tax policy. I'll try to keep it simple and concise, but if you want more detailed analysis, check out the Tax Policy Center's report here. (It's 58 pages, but worth reading) Unless I say otherwise, the TPC's report is my source for all facts and figures in my discussion.

First off, I keep hearing the Republicans say that Obama wants to spend and spend without having any way of paying for it. McCain wants to cut taxes pretty radically too, but I haven't heard many people make the same complaint about him. So what's the truth? Well, to put it simply, both candidates want to cut taxes and spend, but neither one has a real plan to pay for it. How much each plan is going to cost depends on how you want to measure it, but using the Congressional Budget Office's measurement comes out with Obama's plan adding $3.5 trillion in debt, while McCain's plan adds $5 trillion.

Another hot button issue I keep hearing mentioned is the estate tax. (You may also know it as the "death tax" since this term gets thrown around for dramatic effect.) Under the current Bush law, the estate tax is being phased out each year until it is completely repealed in 2010. Then, in 2011, it comes back as it was before Bush's changes. The first $1M is tax free, everything thereafter is taxed at 55%* So even if neither candidate made any changes to the estate tax, your first $1M of inheritance would be tax free. That's probably enough to reassure most people, but just in case you're in line to receive a hefty sum, I'll continue. Obama's plan calls for the first $3.5M to be tax free, with a rate of 45% thereafter. McCain's plan would make the first $5M tax free with a rate of 15% thereafter. These hefty exemption amounts mean that pretty much everyone in America will be free from the estate tax. McCain's estate tax will only hit about 4,000 estates (or the top 0.2%) and Obama's will only hit about 8,000 (or the top 0.3%).

Now that we've established that both candidate's plans lead to an increase in debt and that neither one is going to rob you of your inheritance, let's get down to what you really care about - how is your yearly tax bill going to change? McCain and Obama have very different strategies, but for simplicity's sake, I'll cut to the bottom line. In a nutshell, Obama wants to tax the top 1% and to give tax breaks to everyone else (with the biggest benefits going to the poorest Americans). McCain wants to give tax breaks to everyone (with the biggest benefits going to the richest Americans).

Here's a couple of charts I put together using the information from the TPC report. They both show the average net change in after-tax income by percentile. In other words, positive numbers are good for your bottom line and negative numbers are bad. The first chart shows the situation in 2009 and the second shows 2012. The reason for the difference is that some of each candidate's changes phase in or phase out over time.

And in case you were wondering, the percentiles are as follows:

Percentile	Income
20%	18,981
40%	37,595
60%	66,354
80%	111,645
90%	160,972
95%	226,918
99%	603,402
99.9%	2,871,682

As you can see, on average, unless you're making some serious money, neither candidate is planning to raise your taxes.

There's a lot more to these two tax plans, but I just wanted to cover a few key issues to clear up the confusion and "mis-truths" that have been floating around. If you want more information, I suggest that you read the TPC report that I linked to above.

I tried to keep my opinions out of this analysis and simply present the facts (as determined by the TPC). I'm actually pretty critical of both candidate's plans, but I'll save that criticism for another day.

* This phase out, repeal, restore policy leads to a potential problem. Imagine for a moment that an elderly patriarch is worth, say $100M. If he dies in 2010, his beneficiaries get this $100M estate tax free. If he dies in 2011, his beneficiaries get around $45M after taxes. I'm not saying that anyone would kill their parent/grandparent for $55M, but that patriarch may want to watch his back in 2010.