Democrats Outline Tax Approach
Relief for Middle Earners Would Be Offset by Increases for Wealthy
September 19, 2007
By DEBORAH SOLOMON and SARAH LUECK
Eager to avoid being branded old-style tax-and-spend liberals, the Democratic presidential candidates are starting to roll out detailed proposals to cut taxes for millions of Americans.
But unlike the across-the-board cuts being floated in the Republican field, these are aimed only at lower- and middle-income households, often crafted narrowly as credits for specific expenses, like purchasing health insurance or buying a home.
And, in a Democratic White House, any such tax cuts would be offset by big tax increases on upper-income families, investors and corporations, according to the emerging plans.
"For decades, we've seen a successful strategy to ride antitax sentiment in this country toward tax cuts that favor wealth, not work," Illinois Sen. Barack Obama said as he unveiled his own "middle-class tax relief plan" yesterday. "We shouldn't be distorting our tax code to benefit a few powerful special interests -- we should be insisting that everyone pays their fair share, and when I'm president, they will."
Former North Carolina Sen. John Edwards unveiled his tax-cut plan in July. Democratic front-runner Hillary Clinton has talked in general terms similar to Mr. Obama in discussing changes she'd make to the tax code, although she hasn't yet released a full tax plan.
While their prescriptions vary in detail and scope, the top three contenders are all looking to use the tax code to correct what they say are imbalances that exacerbate income disparities. Their efforts are aimed at wooing voters who are increasingly concerned about their economic security and worried about not being able to afford health care, gas and retirement.
"People feel like they're one loss of health insurance or job loss away from serious problems and the proposals are clearly playing to that," said William Gale, a Democratic tax specialist at the Brookings Institution.
But the plans are drawing criticism from some who say the candidates are pandering to voters by advocating policies that waste tax dollars instead of using the money to confront serious fiscal problems, such as shoring up Social Security and Medicare, which are forecast to run out of money once baby boomers retire.
"I have no problem with them trying to undo all or most of the Bush tax cuts for the wealthy even if it's only for a couple of years, but there are so many huge fiscal problems that we should be very careful about proposing new trivial programs when there's so many real big programs we need to do something about," said Bill McIntyre, director of Citizens for Tax Justice, a left-leaning Washington think tank.
Conservatives are attacking Democrats for using targeted tax cuts to mask what they say are really big tax increases. While Democrats are united in saying they'd let at least some of President Bush's tax cuts expire as currently scheduled, in 2010, Republican White House hopefuls are calling for an extension of the cuts as a starting point. Mitt Romney, the former Massachusetts governor, has given the most detailed Republican tax plan so far. He proposes to eliminate taxes on dividends, capital gains and other investment income for families that make under $200,000 a year -- for an estimated net reduction of $32 billion per year.
Mr. Obama, unveiling his tax plan yesterday, said his cut would equal $80 billion to $85 billion per year and would continue the trend, intensified over the past two decades -- of removing millions more Americans from the income-tax rolls.
[Shifting the Burden]
He said he would eliminate income taxes for seven million senior citizens earning less than $50,000 per year. Another 10 million workers would no longer have to pay income taxes because of a new $1,000-per-family tax credit, which would offset the payroll tax on the first $8,100 of earnings. The tax credit would eliminate income taxes for those individuals whose income tax bill is smaller than the size of the credit and would also provide a tax break to another 140 million Americans, according to the Obama campaign. The credit would phase out for workers making somewhere between $150,000 to $200,000 per year.
Mr. Obama also proposed changing the tax code to make the mortgage-interest deduction apply more broadly by turning it into a credit and allowing taxpayers to benefit even if they don't itemize.
The changes will be financed in part by raising the tax rate on capital gains and dividend income to as much as 28%, a level last seen in 1997. That is a higher amount than the campaign had endorsed. Earlier this year, the Obama campaign said it would raise those rates to 20%.
Earlier this year, Mr. Edwards said he, too, would raise the capital-gains tax rate to 28% from 15% and boost income taxes on those making more than $200,000 to finance tax cuts and other benefits for middle- and lower-income families.
The underlying message of the Democratic candidates' plans -- that wealthier people should pay higher taxes and lower- and middle-income people should pay less -- echoes the theme many Democrats in Congress have adopted.
House Ways and Means Committee Chairman Charles Rangel (D., N.Y.) is working on a tax bill that would reduce taxes for about 90 million people, by eliminating the individual alternative-minimum tax, expanding the earned-income and child-tax credits and increasing the standard deduction. Such changes would result in a revenue loss of about $900 billion over 10 years, which Mr. Rangel said he would offset in accordance with budget rules, possibly by raising rates for upper-income tax payers, closing corporate "loopholes" and raising the taxes paid by the managers of private-equity, hedge and venture-capital funds.
A large tax package is unlikely to become law this year, as Democrats on Capitol Hill have found little common ground with the Bush administration. Still, the House Democrats' effort could lay down markers for a longer-term debate about overhauling and simplifying the tax code that would be resolved when a new president takes office.
—Tim Farnam contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com and Sarah Lueck at sarah.lueck@wsj.com
September 2007 Archives
(See Original Post)
Romney calls for tax cuts on savings
Those earning less than $200,000 are targeted
Former Massachusetts governor Mitt Romney greeted Michael Maccini during a campaign stop at Lahout's Country Clothing and Skip Shop in Littleton, N.H., yesterday Former Massachusetts governor Mitt Romney greeted Michael Maccini during a campaign stop at Lahout's Country Clothing and Skip Shop in Littleton, N.H., yesterday (Jim Cole/Associated Press)
By Lisa Wangsness, Globe Staff | September 8, 2007
NORTH CONWAY, N.H. - Mitt Romney rolled out one of the most detailed tax cut plans yet among the major presidential candidates yesterday, proposing to eliminate taxes on income from interest, dividends, and capital gains for the vast majority of Americans.
In several appearances in New Hampshire, Romney said his proposal, which would give the tax break to those earning less than $200,000 a year, would be a boon to the middle class.
"You can save your money for a down payment on a house, for a car, for a boat, for college for your kids, whatever the heck you want," he told about 75 people gathered at a coffee shop yesterday morning. "Government shouldn't be telling you they're going to tax you on your savings."
But $200,000 a year is nearly five times the nation's median household income of about $44,300 a year. Critics pointed out that while many families would benefit, the vast majority of the total dollar savings would go to the wealthy, who own the most stocks, have the biggest bank accounts, and reap the most capital gains from real estate and other investments.
"For people earning below $100,000, cutting the tax rate on interest, dividends, and capital gains means almost nothing," said Robert S. McIntyre, director of Citizens for Tax Justice. "For those people earning between $100,000 and $200,000, you might be talking several hundred dollars in tax savings. Then, the question is, does he really have a plan that cuts off exactly at $200,000? That would be nuts - the person who makes $200,001 would be kind of angry."
The $200,000 limit applies to adjusted gross income, which includes salaries and investment income. So many wealthy people like Romney, a multimillionaire, whose investment income would take them over the limit, would not qualify for the benefit.
Eric Fehrnstrom, a spokesman for Romney, said the plan would not benefit the wealthiest Americans and pointed out that 95 percent of American households earn less than $200,000.
The campaign did not provide an average savings under the plan, but said that based on 2005 tax returns, more than 56 million taxpayers would benefit from eliminating the tax on interest, 28 million from ending the tax on dividends, and 23 million from killing the tax on capital gains. About 134 million individual returns were filed that year.
"It is a powerful incentive to save, and it's a generous benefit aimed at the middle class," he said.
Richard Holmes, 59, of Lebanon, N.H., a semiretired contract coordinator for a utility company, said the plan could help him when he retires and relies on his savings, as well as Social Security. But he said he also liked the principle of the idea.
"I think it makes a lot of sense," said Holmes, who heard Romney speak at his town's senior center yesterday afternoon. "You shouldn't have to pay taxes on money you've already paid taxes on."
Rob Pelton, a 29-year-old engineer also from Lebanon, said he liked the idea - even though he and his wife, Juliann, 25, would probably not benefit from it since they have not saved much money.
"But I can anticipate that as the years go by there will become a more and more significant tax burden that we have to deal with, and that would make that a valuable suggestion," he said.
Romney's campaign said the plan would cost about $32 billion a year, which would be paid for through economic growth and by limiting growth in nondefense discretionary spending to the inflation rate minus 1 percentage point. The campaign did not say how much revenue would come from each of these sources.
The proposal, Romney said, would not only ease the burden of trying to save for most families, it would also contribute to economic growth.
"As we're saving our money and investing in the bank or investing in stocks, we're going to help encourage the creation of new businesses and grow the businesses that already exist," he said, which means "growing additional jobs."
His campaign said the tax cut plan would also help homeowners struggling with mortgage payments, and also aid people trying to buy houses by boosting savings they could use for down payments, particularly now that the credit crunch has made it more difficult to obtain mortgages.
J.D. Foster, a senior fellow at the Heritage Foundation, a conservative Washington think tank that generally supports tax cuts, said average Americans, who typically do not have significant income from dividends, interest, and capital gains, would not save an enormous amount of money. That's why the plan costs relatively little, he said.
"If you want to save huge amounts, it has to cost large amounts in terms of federal receipts," he said.
Still, Foster said, the tax cut could provide substantial savings to some, including the elderly, many of whom depend on their nest eggs. "If you're trying to encourage low- and middle-income families to save more, you have to" stop taxing the income on their savings, he said.
Romney and other Republicans also vow to eliminate the estate tax on inheritances and make permanent the tax cuts pushed through by President Bush scheduled to expire at the end of 2010. Those cuts, which started in 2003, included lowering the top tax rate on capital gains from 20 percent to 15 percent. Under Romney's plan, those earning more than $200,000 would still pay the 15 percent rate on capital gains.
Some Republicans, including former governor Mike Huckabee of Arkansas, advocate far more sweeping changes, such as a flat income tax rate or eliminating income taxes and replacing them with a national sales tax.
Democrats generally want to let the Bush tax cuts expire for the wealthiest Americans. Some want to repeal some of the cuts sooner to help fund domestic priorities such as universal healthcare.
Former senator John Edwards, for instance, wants to raise the capital gains rates on families making more than $250,000 a year from 15 percent to 28 percent and tax dividends at nearly 40 percent. He proposes exempting the first $250 in investment income from taxes, which he says would mostly benefit the middle class.
His campaign spokeswoman, Colleen Murray, said yesterday that Romney's plan would continue Bush's legacy of tax cuts benefiting the well-to-do. "Americans can't afford another four years of Bush-Romney tax policies that take care of the super rich and leave middle-class families behind," she said in a statement.
Lisa Wangsness can be reached at lwangsness@globe.com.