January 24, 2012 | Comments Off
Written by: Sarah Hackley
As the Republican candidates move from Christian, evangelical South Carolina to Florida, a state still racked by high unemployment and a foreclosure crisis that just won’t end, the hunt is on for the candidate most likely to uproot President Obama. Prior to Newt Gingrich’s South Carolina win, that candidate almost certainly was going to be Mitt Romney. A CNN poll from Jan. 13 – 17 predicted Romney would win Florida with 40 percent of the votes. But, that was before Gingrich nabbed all 23 of South Carolina’s delegates after two debates hammered home Romney’s hesitation to release his tax records. Now, new polls predict Gingrich will win Florida by approximately eight to nine points.
The attacks over Romney’s records, which he has now released, weren’t about transparency as some claimed. Rather, they were about the dawning realization – even among the Republican base – that the tax system in the U.S. just isn’t fair. Romney’s income in 2010 was $21.7 million and he paid just 13.9% in taxes. The tax system is also incredibly complicated, which may be one of the reasons why people are just beginning to get angry about an economic disparity that has been increasing for decades.
Still, regardless of how long it took for everyone to get on board, the truth is in – and middle-class Americans, from both sides of the aisle, are pissed. Unfortunately for the outraged “99 percent,” the fact that the tax system is complicated makes it difficult to pinpoint exactly what it is we’re so angry about it. It also makes it exceptionally difficult for most Americans to figure out where we stand under each candidate’s proposed tax plan.
The reality is that the real median American household income was $49,445 in 2010, a number significantly lower than that of any of the candidates’ incomes, and exponentially less than the profits recorded by the large corporations the Republican candidates are so interested in protecting. If we’re going to get a clear understanding of which presidential candidate’s tax proposal is most likely to give us what we want, we have to start there.
While the majority of Americans pay about 28 percent of their income in taxes, the richest one percent often pay less than 15 percent of their income, and many corporations pay zero. In 2009, for example, General Electric not only owed nothing on its $10.3 billion pre-tax income, it actually recorded a $1.1 billion tax benefit, thanks primarily to the corporate loophole that allows corporations to get tax benefits for overseas operations. Taken together, these corporate loopholes and the low capital gains and dividend tax rates (currently capped at 15 percent) mean most corporations, and the people who run them, are paying less in taxes than the workers who sweep their floors. A fact, billionaire Warren Buffet has noted.
The marginal tax rate, which is the tax rate most recognized by the average American worker, is the percentage a person pays on the last dollar he or she earns. Under current tax law, the marginal rate is 10, 15, 25, 28, 33, or 35 percent, depending on the amount of money earned that year. Money is taxed within each bracket, so a wealthy person pays the smaller percentages on some of his/her income and then 35 percent on most of his/her income. Unless, that is, that person’s income, like that of most of the richest one percent, is earned primarily through investments.
Income taxes on capital gains, dividends, and “carried interest” income (which is how most of the richest Americans make their money) are capped at 15 percent, and Social Security payroll tax does not apply to any income over $106,800. The vast majority of Americans never reach the $106,800 cutoff, so they pay Social Security tax on all their income. But, the richest don’t.
This means that, under current law, middle-class Americans are paying more – sometimes substantially more – than their fair share of the nation’s bills. President Obama’s proposed tax plan changes this.
Under Obama’s plan, a new minimum tax rate would be implemented on individuals who make more than $1 million per year. The new minimum would affect only 0.3 percent of the population, and it would replace the alternative minimum tax (AMT), which the administration says tends to hit “millions of Americans who are considered upper middle class.” Obama also has advocated raising social security income taxes to $190,000 by 2020.
Obama, whose joint adjusted gross income (AGI) was $1.7 million in 2010, has called his plan the “Buffett rule,” after billionaire Warren Buffett, who announced that he paid just 11.06 percent of his AGI in federal taxes in 2010. Though Buffet’s 2010 taxable income was almost $40 million, his salary is only $100,000 per year. Like Republican candidate Romney, the vast majority of Buffett’s income comes from capital gains and dividends. So, like Romney, most of Buffett’s income can’t be taxed at more than 15 percent.
Gingrich, on the other hand, wants to lower the top individual tax rate to 15 percent. This would, interestingly enough, lower his personal tax bill, which was 31.6 percent in 2010. Unlike Romney and Buffett, the vast majority of Gingrich’s income (which totaled $3.16 million in 2010) came from wages and privately held businesses that pay no taxes, but pass through all their profits to his 1040, where it is taxed at the ordinary top rate of 35 percent.
Gingrich’s plan also would eliminate taxes on capital gains and estates, drop the corporate tax rate to 12.5 percent from 35 percent, allow businesses to write off capital expenses, and create an optional 15 percent flat tax with a per-person deduction of $12,000. Under Gingrich’s plan, the top one percent of American taxpayers (whose income is over $629,809) would receive an average tax cut of $343,993 in 2015; which would put their average federal tax rate at 12.5 percent. The top 0.1 percent (income over $2.9 million) would receive an average tax cut of $1.9 million.
While Gingrich would cut taxes for everyone and raise them for no one, it is easy to see who benefits the most under his plan: he does. His plan also would add over $1 trillion to the deficit by resulting in an estimated 35 percent cut in revenue. In short, Gingrich’s plan is completely untenable. We can’t cut taxes on everyone – including the rich and the corporations – and expect to have enough money to run the country. It simply doesn’t work that way, especially when the rich and the corporations haven’t been paying their fair share for years.
Romney has a fairly standard Republican-party tax plan that would keep marginal tax rates the same, reduce the corporate tax from 35 to 25 percent, leave the Bush-era tax cuts in place, and give most tax cuts to the richest one percent. Romney’s plan also would make saving and investing easier for middle-class Americans by eliminating taxes on interest, dividends, and capital gains for taxpayers who make less than $200,000. Unfortunately for the many Americans struggling to afford higher education for themselves, their children, and/or their grandchildren, Romney’s plan also proposes allowing the American Opportunity tax credit to expire. It also reduces the expanded refund ability of the child credit and the expansion of the earned income tax credit (EITC), both of which were enacted in 2009 under President Obama. Allowing all three changes to expire would substantially increase the tax liability for many middle-class Americans.
Ron Paul, arguably the most economically minded of the Republican candidates, has proposed a plan that would do much of what Gingrich’s plan does without adding to the deficit. Like most of the other candidates, he wants to reduce the corporate tax rate (to 15 percent), extend the Bush-era tax cuts, and eliminate the gift tax. To offset the reduction in revenues caused by the cuts, he has proposed ending corporate subsidies (a proposal both the Tea Partiers and the Occupiers can certainly get behind), giving himself a salary of $39,336 (the approximate median personal income of the American worker), and cutting $1 trillion in spending in his first year in office. Paul also wants to repeal the healthcare reform law, the Dodd-Frank Act, and the Sarbanes-Oxley act, all of which are important regulatory measures that hinder only the richest of the rich – primarily corporations – and protect everyone else.
Of the Republican candidates, the tax plan most likely to help the average American family is Santorum’s, which is too bad since he wants to screw them in just about every other way. (To learn how, read his stance on women’s rights, gay rights, government programs, and help for families with children with disabilities.) Still, it must be acknowledged that his tax plan is better for the average American than most of the other conservative candidates.
Santorum’s plan would simplify the complicated tax system by providing for only two individual-income tax rates: 10 and 28 percent. It would triple the personal exemption for dependent children, maintain the earned income tax credit and the child tax credit, and eliminate marriage tax penalties. It would even eliminate the cap on deductions for losses incurred in the sale of a principal residence, which could help many families – like those in Florida, where the foreclosure crisis is still in full swing – who are having to sell their homes at a significant loss. It also, however, would lower the corporate tax rate to 17.5 percent, eliminate corporate taxes for manufacturers, and lower capital gains and dividend tax rates to 12 percent. All of which make it, though the best Republican-proposed plan, worse for the average American than President Obama’s plan.
All of Obama’s proposed changes are geared toward increasing the tax burden on the richest Americans and lowering the cost for everyone else. During the (extensive) debate over the Bush-era tax cuts, Obama wanted to permanently extend the tax cuts for all individual Americans with incomes below $200,000, and all married couples with incomes below $250,000. He also wanted to raise the top tax bracket for the wealthy to 39.6 percent, and the capital gains and dividend income tax rate to 20 percent for the wealthy, while leaving it at 15 percent for everyone else. And, unlike Gingrich’s plan, which added a significant burden to the deficit, Obama’s proposal would add approximately $3 trillion in revenue.
These seemingly small details are important. While the Republican candidates’ tax plans have quite a few similarities – all want to eliminate the estate tax for example – a benefit only to the richest of the rich — there are some important differences between them, both in the overall bottom line (larger deficits versus increased revenues) and in which Americans have to pay the most for their implementation in the long run. And, for the majority of Americans, the answer to who’s getting shortchanged under any of the proposed plans turns out to be them. Unless, of course, we re-elect President Obama.
Sarah Hackley is a full-time professional writer and editor based in Austin, Texas. Learn more at www.sarahhackley.com