Tuesday, June 10, 2008

Obama's Actual Tax Plans

McCain and others have claimed Obama plans to raise everyone's taxes. This is false. There is also a dirty little not-so-secrete about McCain's tax plans you might like to know. First, what are Obama's actual tax plans and what might they mean to you?
  • If you make less than $75,000/year you will probably pay less tax because Obama plans to lower taxes for these taxpayers.
  • If you make between $75,000-250,000 and have stocks in 401K and IRA plans, your taxes will probably stay the same.
  • If you make more than $250,000 your taxes will probably go up as Obama opposes extending the Bush tax cuts for these taxpayers.
  • If you have stock outside of tax-deferred retirement plans, your taxes might go up if you sell for a profit (realize capital gains) (1). However, stocks in 401K and IRA programs will not be affected because they are treated as ordinary income, not capital gains

    Of course, not all plans come to fruition so who knows what will actually happen.

    One thing that is very likely, though, is that the next Congress will have a Democratic majority. To extend the Bush tax cuts will require an act of Congress. Even if McCain wins the presidency, it's extremely unlikely he will convince Congress to extend the Bush tax cuts. Thus, regardless of who wins the White House, if you make more than $250,000/year your taxes will almost certainly go up.

    Finally, Obama is committed to pay-as-you-go budgeting, meaning that he doesn't intend to borrow money every year to run the government (2). This will reduce taxes in the long run because when you borrow money you must pay back what you borrowed plus interest. Since all government income is from taxes, sooner or later taxes will be required to pay the loan off, including extra for the interest. This is why the Bush years increased our taxes in the long run. The Republicans certainly cut taxes for now, especially for Paris Hilton, but they failed to reduce expenditures and borrowed the difference (3). This saves taxes now, but requires us all to pay even more taxes later.

    Obama's fiscal policies are middle-of-the-road, boring and sensible. Probably what we need.

    (1) Obama may, or may not, try to increase capital gains tax. He favors an increase because it's unfair for billionaire Warren Buffet, who makes his money on capital gains and dividends, to pay a much lower tax rate (15%) than his secretary (probably 28%). However, there is some evidence that increasing capital gains taxes can, in some cases, actually decrease revenue because people make fewer trades if the tax is higher. Unlike some, Obama seems to understand that the purpose of taxes is to raise money to pay for the government.

    (2) Because the government is borrowing so much money each year it will take even the most dedicated reformer years to end massive government borrowing.

    (3) Total federal government debt today is about $9 trillion, meaning sooner or later we will need $9 trillion in taxes to pay it off and in the meantime we need about $400 billion in taxes every year to pay the interest.

  • 1 comment:

    Nittin said...

    I totally; agree. I have been following B.OBAMA, even though I am not a US citizen and I must say, he has impressed me the most and by far.

    Would love to see him as the president.