Fall 2008
By Geoffrey D. Bushko, CPA, JD
As the countless candidate placards adorning people’s lawns will testify, election season has arrived. While there are numerous elections that will take place in November, the election drawing the most attention is, of course, for president of the United States. This election cycle brings us two new candidates, Sens. John McCain (R) and Barack Obama (D), but the tax issues up for debate are relatively similar to those in the last presidential election. But make no mistake, no matter which candidate prevails, the country is in for changes to the tax system.
Individual Taxes
Businesses that conduct operations via pass-through entities, such as partnerships and limited liability companies, are likely to be curious about the potential repercussions of each candidate’s tax proposals regarding individuals. The owners of these entities have enjoyed a variety of individual tax benefits from President Bush’s tax cuts in 2001 and 2003. While Sen. McCain would like to make those tax cuts permanent, with an exception discussed below, Sen. Obama would look to retain some of the tax breaks such as lower tax rates for low income and middle class taxpayers, while eradicating others by increasing capital gain and dividend taxes for high income taxpayers (presently stated as individuals who earn $250,000 or more per year).
Corporate Taxes
Corporate taxpayers will also watch this election with great interest. Sen. McCain has indicated he would like to reduce the highest corporate tax rate from 35 percent to 25 percent. Sen. McCain has called for the immediate elimination of the 35 percent tax rate, with the remaining reductions to unfold between 2010 and 2015. Sen. McCain has also proposed expensing all three-year and five-year business equipment; concurrently, his plan calls for denying interest deductions on such equipment. In addition, Sen. McCain has proposed a permanent research and development credit that would equate to 10 percent of the wages a company pays to employees engaged in research and development.
Sen. Obama’s vision for the structure of the corporate tax system was unclear as of press time. However, in June 2008, Sen. Obama indicated in an interview with the Wall Street Journal that he would consider a reduction in corporate tax rates that was contemporaneous with a reduction in unspecified corporate tax breaks. Regardless of any clear stance on the direction of corporate tax policy, Sen. Obama has detailed a few tax benefits for corporate taxpayers. He has indicated that he would make the research and development credit permanent. In addition, he has proposed making the renewable energy production credit permanent.
Estate Taxes
There are a few years left on a previous ambitious estate tax reduction plan. During 2008, the estate tax exemption is up to $2 million, with a maximum tax rate of 45 percent. The estate tax exemption will rise to $3.5 million in 2009, with the same maximum tax rate of 45 percent, and 2010 will usher in a year where the estate tax doesn’t exist. These provisions will sunset at the end of 2010, and the estate tax will return in full force in 2011 with a greatly reduced threshold to the amount of $1 million.
The topic of the estate tax represents something rare in a presidential campaign - agreement between the candidates. Their agreement, however, is relatively narrow in scope as both candidates only agree that the elimination of the estate tax should not be permanent as the current administration advocates. From there, their respective thoughts on the estate tax take divergent paths. Sen. McCain advocates an estate tax that would have an up-to-$10 million exemption, and a maximum tax rate of 15 percent. Sen. Obama supports an estate tax with an up-to-$3.5 million exemption, and a maximum tax rate of 45 percent.
Most of the information in this story, as well as other positions, is available on each candidate’s Web site. For a more complete view of the candidate’s tax policies, the Tax Policy Center of the Urban Institute and Brookings Institution has released a document entitled "A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans."
This is an excellent summary of the proposed tax policies of the two candidates, and sets forth the purported cost of their respective tax plans. The document will be continuously updated between now and the election, and can be found at www.taxpolicycenter.org.
While no one can predict what the tax landscape will look like in a few short months or over the course of the next four years, it is helpful to have an understanding of the direction in which things could head. With an understanding of each candidate’s tax plans, you can begin to develop plans for your clients now so that, no matter who wins the election, you and your clients will have the ability to act calmly as necessary instead of being forced to react with urgency.
Geoffrey D. Bushko, CPA, JD, is a graduate of Temple University’s James E. Beasley School of Law, and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at gdbushko@aol.com.
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