This election cycle, msnbc.com is presenting a weekly series, Briefing Book: Issues '08, assessing issues and controversies that the next president must confront.
This week, we look at your federal tax burden.
In 2004, ten million more people filed tax returns than voted in the presidential election.
But whether you're a voter or not, the outcome of U.S. elections affects the tax burden of all Americans.
Why it’s a problem
Every dollar you pay in federal taxes is one less dollar for your groceries or your children’s college fund.
The federal government takes about one-fifth of all national income each year.
But your aging mother on Medicare would be in tough spot were it not for federal tax revenue — so would the safety inspector who checks that plane you’re about to board for a cross-country flight.
And the tax system reflects our current ideas of fairness.
Are highly paid Americans carrying enough of the nation’s tax burden — or carrying too much? Is the single mother who earns $40,000 paying too much in taxes, or too little?
If you’re in the middle of the income distribution — the middle 20 percent of all households — you pay 14 percent of your total income to the federal government in the form of taxes, according to the Congressional Budget Office.
You and other middle-income people are carrying about nine percent of the total federal tax burden.
But if you are in the top 20 percent of all households, measured by income, you and other high earners are carrying nearly 70 percent of the entire federal tax burden.
If you’re in the top fifth of all households, your effective federal tax rate is 25 percent. That means that of every $100 in gross income, you get only $75 after the federal tax bite.
Where the candidates stand
What’s going to happen to your tax burden under a new president?
The short answer is this:
- If Obama wins, upper-income people will almost certainly end up shouldering more of the burden.
- If McCain wins, upper-income people might get a tax cut, but only if McCain can persuade what’s likely to be a Democratic-controlled Congress to agree with him.
Obama proposes to raise the Social Security tax for upper-income people.
Currently the 12.4 percent tax is imposed on the first $102,000 of earned income, with the worker and the employer each paying 6.2 percent.
Obama wants to increase the Social Security tax on people with earned income above $250,000.
Obama’s economic advisor Jason Furman described this as “asking those making over $250,000 to pay their fair share.” But Furman said Obama isn’t ready to spell out the details, such as the tax rate that he’d impose on those making above $250,000.
McCain has not yet said whether he would support or oppose an increase in Social Security taxes.
When it comes to income taxes, Obama proposes to raise rates for upper-income people by going back to the 36 percent and 39.6 percent rates imposed on that demographic during the Clinton era.
He's also pledging changes to the estate tax system. Estate taxes are imposed on the assets left by wealthy people to their heirs, and currently, the maximum tax rate is 45 percent, with the first $2 million of an estate’s assets not taxed.
Obama would exempt the first $3.5 million of an estate and retain the 45 percent tax rate, but McCain wants to cut the estate tax rate from 45 percent to 15 percent and make the first $5 million of an estate tax-exempt.
The Democratic candidate wants new tax breaks for low-wage workers as well as a tax exemption for people over age 65 who earn less than $50,000.
According to an analysis by the non-partisan Tax Policy Center, under Obama’s blueprint, “The largest tax cuts, as a share of income, would go to those at the bottom of the income distribution, while taxpayers with the highest income would see their taxes rise significantly.”
McCain, by contrast, would like to permanently extend the 2001 income tax rate cuts.
“McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households,” said the Tax Policy Center.
Unanswered questions
In its analysis, the Tax Foundation said, “The Obama plan assumes little behavioral change from such a large tax hike on high-income workers. Is this realistic or will the higher rates encourage tax minimization strategies and reduced work effort, which will lead to lower tax revenues?”
The Tax Foundation is nonpartisan research group, but its board of directors includes Columbia University economist Glenn Hubbard who served as chairman of the Council of Economic Advisers under President Bush from 2001 to 2003.
In the likely event that both houses of Congress are controlled by the Democrats, three crucial questions will emerge:
- How large will the Democrats’ majorities be? Will House Speaker Nancy Pelosi have 300 Democrats to work with, rather than her current 236?
- Will the newly elected Democrats be eager to increases taxes on the wealthy? Or will many of them be pro-investor, business-friendly Democrats who’d be wary of moving too far in redistributing wealth?
- What will be the agenda of the likely heads of the two congressional committees that write tax law, House Ways and Means Chairman Charlie Rangel of New York and Senate Finance Committee Chairman Max Baucus of Montana?
Baucus, in particular, could be the person with the most power to change the president’s tax proposal.
His record indicates that he is more inclined to help upper-income taxpayers than Obama is. Baucus was a chief architect of the 2001 tax law that cut income tax rates and phased out the tax on inherited wealth.
His spokeswoman said Baucus wants to see the 2001 rate cuts and other tax breaks such as the child tax credit extended.
A Baucus critic, left-leaning syndicated columnist and author David Sirota, said “I don’t expect Baucus to play a very progressive role” in the tax debate next year. “Baucus could play a destructive role. He is potentially as big an obstacle to real tax reform as any rank-and-file Republican.”
Evolution and shifts in position
Since Obama began serving in the Senate in 2005, he has consistently voted against efforts to cut taxes on investment income and to reduce or abolish the estate tax.
During this 2008 campaign, McCain has advocated cutting income tax rates and reducing the estate tax. But in 2001 and 2003 McCain opposed the same kind of tax cuts that he now favors.
In 2001, he voted against a bill supported by President Bush that cut income tax rates and phased out the estate tax.
The 2001 bill also doubled the tax credit that parents got for each child, from $500 to $1,000.
McCain was one of only two Republican senators to vote against final passage of the 2001 bill.
In 2003, McCain voted against a bill that cut taxes on investment income and accelerated the income tax cuts that Congress had enacted in 2001. McCain was one of only three Republican senators to vote “no.”
How they have voted
Looking only at how each senator voted on tax proposals is akin to examining only half of the balance sheet. A vote for more spending could matter as much as those tax votes.
McCain voted in 2003 against the Bush administration’s new Medicare prescription drug entitlement program. This program will add at least $400 billion to the taxpayers' burden just in its first ten years, according to an estimate by the Congressional Budget Office.
In 2005, Obama voted for an energy bill which included $14.6 billion in tax breaks and credits, including $2.8 billion in incentives for fossil fuel production and $1.3 billion in incentives for alternative-fuel vehicles. McCain voted against that bill.
As former Treasury Department official Eugene Steuerle points out, such tax breaks must paid for through higher tax rates.
In 2006, McCain voted for a bill that extended lower tax rates on investment income (capital gains and dividends) through 2010. Obama voted against the bill.
In recent years the Senate has had several votes on proposals to lower or entirely get rid of the estate tax.
In 2006, the Senate voted on a procedural motion to debate a bill that would have permanently repealed the estate tax. The tally was 57-41, three votes shy of the 60 required under Senate rules. Obama voted against the effort to abolish the tax. McCain voted for it.
The Senate also voted last year on an effort to modify the estate tax by making the first $5 million of an estate free from the tax, and setting the top tax rate at no more than 35 percent, beginning in 2010. McCain voted for this idea, but Obama voted against it.
Surprises for the new president
The health of the economy will influence the tax debate.
Veteran tax lobbyist Ken Kies, the former chief of staff of the Joint Congressional Committee on Taxation, said, “If in January or February we’re in a serious recession, and a world-wide recession, most people will think that is not a good time to increase taxes on individuals,” as Obama wants to do for upper-income people.