The first presidential and vice-presidential debates have been dominated by competing tax-cutting plans, which pit the collective good of the "village" against individual self-interest. Government vs. the marketplace, collective good vs. individual profit. What do these plans entail and how will they affect you?
Narrowly-focused and modest, it aims at what he perceives is the collective social good. While his campaign trumpets tax breaks for education, his proposal is meager, paying only for a fraction of education costs, and is unavailable to many middle class taxpayers. Ironically, several new tax breaks involving home sales and liberal use of retirement funds, will benefit middle and upper income taxpayers. Here's the Clinton plan:
Taxpayers with joint incomes under $70,000 (single filers with incomes less than $50,000), would get an annual $1,500 tax credit for the first two years of post-high school education ($3,000 in total). Part-time students are entitled to a $750 per year credit until they complete two years of higher education. Students must maintain a "B" average. And those with a felony conviction for using dangerous drugs (including marijuana) are ineligible for the program.
In addition to the tax credit program, taxpayers meeting these income limitations may deduct $10,000 for total educational expenses. The $10,000 deduction is an overall limitation, regardless of how many children the family must educate.
Comment: The education program is well intentioned, but its eligibility requirements are too restrictive. Also, there is too much government meddling with school-grading policies: Will the "B" average requirement lead to "grade inflation?" What about courses taught on a "pass-fail" system? Will students be discouraged from taking harder academic classes because of grade concerns?
Regarding the disqualification for a drug conviction, enforcement is not clear. Also, why should a prior drug conviction stop someone from later trying to improve his life? Does this disproportionately impact minority groups, which have a higher felony conviction rate for drug offenses?
Reviving the deduction for interest payments on educational loans would provide educational incentives for all taxpayers, with none of the value-laden pitfalls of the Clinton proposal.
Clinton is offering a $300 per child tax credit for 1996, 1997 and 1998 tax years, and $500 per child in 1999 and thereafter, for families whose adjusted gross income (AGI) is under $60,000. The credit will be phased-out between $60,000 and $75,000.
Comment: Part of Clinton's original campaign promise of a middle-class tax cut, it is narrowly targeted to the lower end of the middle class. Unfortunately, these benefits, along with the President's educational benefits, will prove illusory to many middle class taxpayers.
Clinton wants to double the current income requirements for IRA contributions. For joint filers, the deduction will be phased-out for incomes between $50,000 and $100,000. For single filers the phase out begins at $35,000 and ends at $70,000. The current $2,000 maximum contribution will be indexed for inflation. Also, he has proposed penalty-free withdrawals for major life expenses, such as education, training, first-time home purchases and financially devastating medical expenses (including nursing care for one's parents). Permissible IRA investments would be expanded to include state pre-paid tuition programs.
Comment: Allowing penalty-free withdrawals for education expenses could be extremely useful. IRAs have proven to be tremendous wealth-generating vehicles since all earnings are tax-free until withdrawn. If approved, the IRA could become the major investment vehicle for future educational expenses.
Clinton proposes eliminating $500,000 of taxable gain on sales of a principal residence by a joint filer ($250,000 for single filers), once every two years and will replace the current once-in-a lifetime exclusion of $125,000 for taxpayers over age 55, plus the tax-free deferral provisions for replacing a home of equal or greater value.
Comment: This is a huge tax break for those with expensive homes and will permit the downsizing of home ownership without tax. Those selling high-priced homes and moving to an area with lower housing costs could realize tremendous savings, enough to pay for educational costs and provide for retirement.
Senator Dole's centerpiece is an unrestricted tax cut in income and capital gains taxes, which he believes will stimulate the economy and encourage investment and savings. Absent from the Dole plan are the restrictive and targeted tax cut approach espoused by Clinton. The Dole plan is much more ambitious. Criticism against his approach is that it will increase the deficit. Here's the Dole tax plan:
Personal income tax rates will be cut by 5% each year for three years beginning in 1997.
Comment: Cuts in personal income tax rates, the mantra of "supply-side" economics, were central to the Reagan tax plan, the Tax Reform Act of 1986. Those cuts lead to a huge increase in the national deficit because Congress failed to cut spending to match decreased revenues. Whether this will occur under the Dole tax-cut proposal has been the subject of non-stop debate.
Curiously, this income tax cut will subject approximately 6.6 million taxpayers to the complicated alternative minimum tax (AMT), according to the Congressional Joint Committee on Taxation, and may prove of little actual benefit because of current AMT provisions. The AMT will adversely affect Californians, New Yorkers and others who pay high state taxes.
The maximum capital gains rate will be halved. The maximum rate will be 14%.
Comment: Cuts in capital gains taxes disproportionately benefit the richest Americans, since they have the excess capital to invest and generate capital gains. Cuts in capital gains are supposed to stimulate investment and economic growth because those receiving the tax cuts will reinvest in the U.S. economy. This is known as "trickle-down" economics.
Another tenant of trickle-down economics is that individuals should be making investment decisions, not the government; therefore, by taking money out of the hands of government (by reducing taxes) and placing that money in the hands of individual investors and entrepreneurs, society will benefit.
There are solid arguments for treating capital gains differently than ordinary income: Capital gains occur when an asset is sold at a profit which means the investor took an investment risk which should be rewarded. Also, an investor might wait many years before realizing his capital gain and inflation will have reduced the "real gain" substantially. The counter-argument is that capital gains relief unfairly benefit the richest Americans at the expense of the middle-class -- whose taxes must be raised or government benefits reduced to pay for the capital gains cut. Further, those who benefit from these tax breaks are under no obligation to reinvest those savings in the U.S. economy.
Finally, savings and investment goals can be accomplished by liberalizing IRA and retirement contribution rules. Most middle-class taxpayers invest through their IRAs and company-sponsored retirement plans which pay no capital gains on their transactions.
Obviously, the debate over the merits of a capital gains tax cut is a defining campaign issue.
Senator Dole provides a $500-per-child tax credit for children under 18 for families earning $110,000 a year ($75,000 for single heads of household). Penalty-fee IRA withdrawals for educational expenses is also permitted, plus repeal of the tax increase on social security income passed by Congress in 1993.
Comment: The IRA provisions are similar to Clinton's proposal and will benefit families paying for education. The child tax credit will help families with larger incomes under the Dole proposal. Reduction of social security tax increases will appeal to the elderly, but at what federal cost?
Dole has offered a $500 per year, per child, tax-free investment into an Educational Investment Account for couples with AGIs of $110,000 or less and single head of household filers with AGIs of $75,000 or less. These accounts may be funded with the child tax credit or after-tax dollars. Funds may be withdrawn tax-free after 5 years to meet education costs. Also, interest on student loans will qualify as an itemized deduction for 5 years. These benefits will be phased-out for single taxpayers with AGI's between $45,000 and $60,000, and joint filers with AGIs between $65,000 and $85,000 and will be adjusted for inflation.
Comment: Dole's education proposals are smaller in scope and with less governmental regulation than Clinton's. Also, more middle-class taxpayers will qualify under the Dole proposals. The deduction for student loans addressed a major problem: recent college graduates bear enormous education debts and must repay both the interest and principal from after-tax dollars. An interest deduction will lessen this burden.
Like Clinton, Dole proposes eliminating capital gains on the sale of a residence. The Dole plan provides for an exclusion to $250,000 for joint filers during the first 10 years of ownership; however, his exclusion for couples grows to $500,000 (at the rate of $25,000 per year for years 11 through 20). Dole's plan is less ambitious than Clinton's and because Dole will cut capital gains to 14%, his savings are less dramatic.
Comment: My comments about Clinton's proposal apply here as well.
Dole proposes an additional $1,000,000 exclusion from estate taxes for family-owned businesses and farms.
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One of Senator Dole's best applause lines is to "end the IRS as we know it!" There would be tax amnesty for one-year in which non-filers may pay their back taxes without penalty or interest charges. The burden of proof in tax cases will shift from the taxpayer to the IRS. He will end controversial "life-style" audits which ask personal questions about a taxpayer's spending habits. He eliminates IRS filings for taxpayers who have wages subject to withholding and less than $250 of investment income. He hopes to eliminate the "IRS bureaucrats" by 30% by 1999; those remaining will help taxpayers comply with the tax code, rather than waiting to " pounce on them with an audit."
Comment: Senator Dole's efforts to end the IRS may not be necessary: According to news reports, the IRS will self-destruct on January 1, 2000, because the IRS computers will not be able to handle the change in date to the year 2000!
The amnesty program has been consistently rejected as unfairly rewarding taxpayers who failed to comply with the tax laws, while punishing those who have paid their taxes, along with the penalties and interest. Life-style audits are already an unacceptable intrusion into the personal lives of taxpayers and have caught the attention of Congress.
Shifting the burden of proof to the IRS might work in instances where the taxpayer has cooperated and provided all available information to the IRS and the taxpayer's claim is reasonable. The level of proof necessary in tax cases, however, should be relaxed. The use of averages and approximations when actual receipts are unavailable, should be permitted. Also, industry standards for deductions should be considered as substitutes for actual proof and documentation.
Elimination of unnecessary tax filings and promoting correct filings, rather than using audits to punish taxpayers, are desirable goals to be pursued by whomever becomes president.
Tax policy has taken center-stage in the 1996 campaign for presidency. The Clinton plan reflects general satisfaction with the economy. Modest in scope, it uses tax cuts to target "socially desirable" investments. The Dole plan is much more aggressive and incorporates the tax-cut philosophy of supply-side economics to stimulate economic growth.
Does the economy need tax cuts, or is it on the right track? Will the projected economic growth under the Dole plan actually materialize? Will it be enough to off-set the tax revenue loss, or will it balloon the national deficit? Does the Clinton plan go far enough? Do government targeted tax cuts work? These questions will be answered only by the voters on November 5th.
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