Don't Mess With Taxes

We have 928 days until our tax system implodes.

OK, that is a bit dramatic. The United States' overall method of collecting taxes won't self-destruct, despite the wishes of many.

But when 2011 rolls around, the current batch of tax laws that we've been living with, most of them enacted shortly after Dubya moved into the White House, will expire.

Of course, since this is a presidential election year, we're hearing a lot about what's going to happen in 2009 when Barack Obama or John McCain get to rearrange the West Wing's furniture. But the truth is, both men, and to a large degree the political parties they represent, are hamstrung by Dubya's tax law changes.

Taxes are never popular and they take on added weight when an economy is stumbling as ours is right now. And even if a good case can be made for targeted tax increases, the proposer of such faces an overall PR problem because most of us tend to react viscerally rather than intellectually to taxes.

So you've got to hand it to this Administration. While it never got the permanency it sought for its tax laws, by bundling them all with a single ending date, it has effectively forced the hands of future legislators to at least phase in selected increases and, in many cases, retain at least for a while the current laws.

A tax standoff by any other name would smell … : For the last few years, the confluence of tax expiration dates has been referred to as the perfect storm.

But the tax cuts are not some act of nature that just happened to line up to make life difficult for those who want to alter them. They are the handiwork of men and women who ingeniously crafted them to self-perpetuate in the face of public opinion and politicians' strong sense of self-preservation.

That's why York Times' columnist Paul Krugman's description of the expiring tax laws is much more accurate. In today's paper, he writes:

"[T]he tax cuts enacted by the Bush administration are, in effect, a fiscal poison pill aimed at future administrations. True, the tax cuts won’t prevent a change in management -- the Constitution sees to that. But they will make it hard for the next president to change the country’s direction."

Well played Dubya et al, for yourself if not the country.

Obama taxes vs. McCain taxes: Krugman's assessment was prompted by his review of a study, A Preliminary Analysis of the 2008 Presidential Candidates' Tax Plans, recently released by the nonpartisan Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

On the individual tax side, McCain would permanently extend the 2001 and 2003 tax cuts and  increase deductions for taxpayers with dependents; on the business tax side, he would reduce the corporate tax rate and allow some immediate business deductions for certain capital equipment.

Obama would permanently extend the 2001 and 2003 tax cuts but primarily those affecting individuals making less than $250,000 and would enact new and expanded targeted tax breaks for workers, retirees, homeowners, savers, students and new farmers. Obama would increase the capital gains and qualified dividends tax rates tax rates.

Both men would keep the estate tax in place but propose increasing its tax exemption level and reduce the estate tax rate (McCain more than Obama) that would resume on Jan. 1, 2011.

McCain's plan or substantial tax cuts offset "only very partially" by a broadening of the tax base would have some positive economic benefits, but says TPC, the "adverse effects of the resulting increase deficits may make the net effect of the plan economically harmful.'

Obama's proposed tax cuts are primarily aimed at "reducing burdens on low- and middle-income taxpayers" and would make the tax system much more progressive. However, Obama's tax equity efforts, says TPC, would similarly reduce federal tax revenues leading to additional deficit concerns and the changes would come "at the the cost of higher tax rates and additional complexity."

The graph below from The Wall Street Journal demonstrates the taxpayer dollar effects under the Obama and McCain plans.

Read more about it: More on the TPC presidential candidate tax plan analysis is available in the organization's abstract, its full PDF version of the report, and in this post by Howard Gleckman, senior research associate at the Urban Institute and editor of TaxVox.

The study's findings prompted my tax blogging colleague taxgirl to wonder, McCain v Obama on Tax: Is It Really Just the Lesser of Two Evils?

Similarly, another NYT writer, Larry Rohter, asked Will the Real Tax-and-Spender Please ’Fess Up?

And writing about the TPC study for the Wall Street Journal (see graph above), Deborah Solomon notes that "Regardless of who wins the presidency, the report predicted that the federal budget deficit would continue to increase. Using the study's tax assumptions, Sen. Obama's plan would add $3.3 trillion to the national debt and Sen. McCain's would add $4.5 trillion over 10 years."

Which brings us back to Krugman's characterization.

So what's your preferred beverage to wash down the poison tax pill?