The Candidates’ Tax Proposals - Crunching the Numbers - part 2

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, October 29, 2000.

Copyright © 2000  Robert L. Sommers, all rights reserved.

The Candidates’ Tax Proposals

Adding fuel to the tax cut debate, last week IRS released statistics for the 1998 tax year (the latest year available) showing that the effective tax rate for the wealthiest 1% (adjusted gross incomes of $269,496 or higher), actually dropped from 27.9% to 27.1%. This group paid 34.75% of all income taxes paid by individuals.

Both presidential candidates use the Office of Management and Budget’s projection that, based on current economic activity and government spending, we’ll have a $4.56 trillion surplus in 10 years. Texas Governor Bush proposes a $1.3 trillion tax cut accomplished by reducing current income tax rates. Vice-President Gore counters with a suggested $480 billion tax cut generated by specific deductions and exemptions aimed at lower and middle income taxpayers (those earning between $100,000 and $110,000). Gore offers a smaller tax cut because he favors paying down the national debt which, he claims, will save the government $300 billion in interest payments over 10 years.

Both candidates would extend the charitable deduction to taxpayers who do not itemize and both would raise the thresholds for phasing out the child tax credit from $110,000 to $200,000 for joint filers, and from $75,000 to $200,000 for single parents. Bush would increase the current per-child tax credit to $1,000, while Gore favors the current $500 per-child credit.

The candidates differ on fixing the marriage penalty: Gore would double the standard deduction for joint filers, while Bush favors a 10% deduction for two-earner families to a maximum of $3,000.

The Bush Proposal – Lowering Marginal Tax Brackets

Single Taxpayer

Thus, under the Bush proposal, a single person (standard deduction with one exemption) with a taxable income of $50,000 would receive a 10.5% tax reduction worth $911. If the taxpayer made $500,000, he would receive a 14% reduction worth $24,355. The conclusion: Despite the claims to the contrary, Bush’s income tax reductions favor the wealthiest taxpayers, both in actual dollar amounts and in the percentage of tax reduction.

Married Filing Jointly

Under the Bush proposal, joint filers (standard deduction with two exemptions) with taxable income of $75,000 and $750,000 would receive the following tax benefits: an 11% reduction worth $1,326 and a 15% cut worth $40,136, respectively.

Alternative Minimum Tax

Now, factor in the Alternative Minimum Tax: Suppose the single person making $500,000 a year in wages and the married couple earning $750,000 a year in wages also had $200,000 worth of incentive stock options (a preference under the AMT). Note: For simplicity, there are no other income sources and no itemized deductions. TurboTax’s Tax Estimator software was used to determine these numbers. The result: There is no advantage to the single filer and the couple’s $40,136 tax break is reduced to $4,900. Thus, what the Bush tax cut offers, the AMT overrides.

The Gore Approach – Targeting Tax Relief for Certain Taxpayers

The Gore proposal specifically targets certain economically disadvantaged groups with selective tax breaks. For instance, Gore wants to provide a $500 tax credit to poverty-level families with three or more children. He also has tax deductions for education and life-long learning.

Al Gore wants to target tax reductions to lower and middle-class taxpayers who incur certain types of expenses which is contrary to George Bush’s approach. It is the opposite approach from George Bush. The following are the major tax breaks for individuals:

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All contents copyright © 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.