Election Taxes

1. ElectionTaxes estimates future taxes under current law numbers based on law that is in place in September 2008. However, many (most?) commentators believe that Congress would not allow the tax increases that are scheduled to occur at the end of 2010 to become effective.
2. ElectionTaxes is static in the sense that it does not consider the macro-economic effects of the current law, Senator McCain’s proposal or Senator Obama’s plan. The plans are likely to differ in terms of the ways they affect investment and consumer spending behavior, and these effects are not included in the model. ElectionTaxes also does not consider the effects of Senator McCain’s substantial proposed cuts in estate and gift taxes and the corporate income tax. Users interested in dynamic modeling effects such as these should consult the excellent work performed by the economists at Tax Policy Center.
3. ElectionTaxes applies user inputs of 2008 tax information and adjusts them forward for inflation. Inputs for income and expenses are adjusted annually for an assumed 3% inflation rate over the forecast period. For this purpose, income and expenses include capital gains and losses but exclude mortgage interest expense for which a separate assumption is provided below.
   1. In some cases in the model (e.g., threshold and exemption amounts, Hope credit AGI thresholds that are most recently stated for 2007, and the investment income limitation for qualifying for the earned income tax credit), ElectionTaxes estimates 2009 levels assuming 3% inflation applied to 2007 or 2008 IRS-published figures.
   2. The 3% inflation rate can be used as a point estimate to generally gauge the comparative effects of the candidates’ tax plans. It should be noted that it is highly unlikely that any taxpayer’s 2008 complete income and expense items (aside from mortgage interest expense, which is estimated under a different set of assumptions given below) will be adjusted for an amount that exactly equals the assumed 3% annual inflation rate.
4. Both candidates have mentioned possible additions and/or changes to their formal plans. As examples, Senator McCain has discussed the possibility of eliminating the individual alternative minimum tax and Senator Obama has mentioned the possibility of extending a portion of the social security levy to upper-income salaries and wages in order to address likely deficits in the social security retirement fund. ElectionTaxes is based upon the plans outlined by the candidates’ economic advisers and that appear on their respective websites (see http://knol.google.com/k/jeffrey-gramlich/the-mccain-and-obama-tax-plans-for/2k7f943jjgete/3# for more details).
5. ElectionTaxes assumes that the amount of investment interest expense for alternative minimum tax (AMT) purposes is the same as for regular tax purposes. The model also assumes that there are no non-itemized-deduction AMT adjustments or preferences. ElectionTaxes uses the 2008 AMT exemption amounts determined by the Emergency Economic Stabilization Act of 2008 (Title VIII, Section 102), and adjusted forward based upon the assumed inflation rate (see above).
6. Both candidates have proposed substantial changes to the nation’s health policies. Senator Obama’s plan to lower costs and increase health insurance coverage across Americans rests largely outside the realm of the tax code. Conversely, Senator McCain’s plan to reduce health care costs for Americans currently covered by health insurance resides largely inside the tax code (see http://knol.google.com/k/jeffrey-gramlich/the-mccain-and-obama-tax-plans-for/2k7f943jjgete/3# for further discussion). Thus, while generally it would be an important mistake for a voter to consider a candidate’s tax policies in isolation of her/his other policy proposals, this is a specific and clear example where it would likely be erroneous for a voter to consider tax policy without also considering non-tax healthcare policy proposals. In an effort to maintain parity (i.e., to treat them fairly), the current version of ElectionTaxes excludes the health insurance-related provisions of both candidates (this is similar to the approach used by Tax Policy Center).
7. ElectionTaxes assumes that Senator Obama’s proposal for a $50,000 senior citizen income exemption will be a deduction for adjusted gross income, thereby affecting phase-outs and limitations that are based upon adjusted gross income.
8. In forecasting the mortgage interest deduction, ElectionTaxes assumes that 2008 mortgage interest decreases 1.25% per year into the future based upon the underlying assumptions that the taxpayer has a fixed rate mortgage, no changes to that mortgage and the mortgage is in the first 10 years of the mortgage. The model also assumes that no new, refinancing or second mortgages are added during the forecast period.
9. ElectionTaxes assumes that the extension for the beginning of the phase-out of the earned income credit will be $3,100 in 2009 under current law and under Senator McCain, and $5,000 for Senator Obama, and that these extension amounts will be inflation-adjusted after 2009.
10. ElectionTaxes assumes that the taxpayer is not a dependent of another taxpayer (i.e., s/he has the legitimate right to claim her/his own personal exemption).
11. ElectionTaxes assumes that the user is a full-time student for purposes of the saver’s credit if the user inputs a positive number for post-secondary school tuition and education fees.
12. ElectionTaxes assumes that the child and dependent care tax credit thresholds under Senator Obama’s plan are adjusted for inflation after 2009.
13. ElectionTaxes does not consider the possibility of child support increasing the amount of Earned Income Credit available under the Senator Obama plan.
14. ElectionTaxes currently maximizes the Earned Income Credit rate at 40%. Senator Obama’s proposal increases from 40% to 45% the credit rate for taxpayers with three or more children. Therefore, ElectionTaxes understates the amount of the Earned Income Credit for taxpayers with three or more children under Senator Obama’s plan.
15. In estimating both the existing Hope Credit and Senator Obama’s American Opportunity Tax Credit, ElectionTaxes assumes that the user only qualifies in 2009. If a second year is available to the user because she or he is in the second year of post-secondary education in 2010, the credit would also apply in that year. In other words, the model does not consider possible Hope or American Opportunity Tax Credits in post-2009 years. If a user wants to see the effect of these tax credits on a future year, under the current ElectionTaxes version the only option is to enter the tuition and fees amount currently to see the 2009 effect and extrapolate to 2010 or later years based on the 2009 effects.
16. For taxpayers who are married and filing jointly, ElectionTaxes assumes that only one taxpayer receives earned income and is eligible for Senator Obama’s proposed Making Work Pay credit. Note, however, that under Senator Obama’s proposal, both taxpayers are eligible for the credit for the first $8,100 of earned income each (though we assume that only one is working).
    1. Note that this assumption is not completely consistent with another ElectionTaxes assumption being made concerning the existing child care credit (which is also effectively Senator McCain’s proposal). Under current law, the maximum eligible expenses for taxpayers filing joint returns are limited to the earned income of the lower income-earning (but capable) spouse (with income inferred for full-time students). For the purpose of determining the amount of the existing child care care credit under current law and Senator McCain, ElectionTaxes assumes that the earned income of the lower income-earning spouse equals or exceeds the amount of eligible expenses for the purpose of the child and dependent care credit.
17. ElectionTaxes is not an attempt to model the entire current tax law, nor 100% of the details of either candidate’s tax proposal. If it works as intended, some users may find that it could provide informative input to a debate about the merits of the candidates’ tax plans.
18. ElectionTaxes should not be construed in any way as tax advice. It is the taxpayer/voter’s responsibility to understand the existing tax law and the candidates’ proposals, and to understand the particular constraints, limitations, and rules that apply to a particular situation. Further information about the current tax law should be obtained by consulting a reputable tax adviser who possesses the appropriate credentials for delivering tax advice. One can also start by consulting the Internal Revenue Code (see http://www.fourmilab.ch/ustax/www/contents.html) and the Internal Revenue Service website, http://www.irs.gov/. Updated information concerning the candidates’ proposals can be found at www.barackobama.com, http://www.johnmccain.com/ and http://www.taxpolicycenter.org/, as well as the contents of the candidates’ speeches and press releases.
19. Long-term capital gains refer to all net gains on capital assets held for more than a year. ElectionTaxes does not facilitate separate treatment for long-held capital assets under the law that is set to be reinstated in 2011 (i.e., the 8% and 18% capital gain tax rates for qualified assets held for five years).
20. Although Senator Obama would include the value of “carried interest” in ordinary taxable income, ElectionTaxes does not contain a specific line for carried interest. Carried interest typically refers to the value of a hedge fund manager’s shares in the fund that are received as compensation for managing the fund. To gain a more accurate indication of the tax cost of the Senator Obama plan, a person receiving “carried interest” income would presumably want to include the value received as salary income under the Senator Obama plan but not under existing law or the Senator McCain plan.
21. In August 2008, Senator McCain proposed a tax credit of up to $5,000 for consumers who purchase a zero carbon emission car. Given that details for the credit are not yet available from Senator McCain’s campaign and that such cars are not yet currently widely available, ElectionTaxes currently does not consider this tax credit.
22. ElectionTaxes does not consider many provisions of existing tax law because they apparently do not differ across the candidates or between the candidates and current law. As just one of many possible examples, consider the Lifetime Learning Credit of IRC Section 25A(c). Since no changes to the Lifetime Learning Credit are currently contemplated by either candidate, this credit is not considered relevant to the question of which candidate’s tax policy best reflects America’s values. There are many examples of other provisions of the tax law that are not modeled because they do not differ between the candidates or between the candidates and current tax law. Examples include, but are not in any way limited to, the child tax credit, the foreign earned income exclusion, the wealth effects of Roth IRAs, and installment sale treatment for the proceeds from sales received over multiple tax years.
23. ElectionTaxes does not estimate taxes other than individual federal income taxes. Examples of taxes that are excluded are (but are not limited to) estate and gift taxes, foreign income taxes, excise taxes, social security taxes, corporate income taxes, Medicare and unemployment taxes, state and local taxes (e.g., state and local income, sales and use, inheritance, and property taxes).
24. ElectionTaxes assumes that the standard deduction will be inflation-adjusted under current law, under Senator McCain, and under Senator Obama.
25. ElectionTaxes does not consider the potential taxpayer effects of Senator McCain’s optional tax system because the proposal remains vague and unspecified at this time.
26. In determining the earned income credit, ElectionTaxes assumes that the entire amount of “Other ordinary income” is investment income. This simplifying assumption has the potential erroneous effect of understating (or eliminating) the earned income credit by overstating the income that is subject to the investment income threshold, thus making the taxpayer ineligible for the earned income credit. This simplifying assumption is not required when using the downloadable Quantrix model.
27. To reduce the number of input variables and thereby simplify the model, ElectionTaxes assumes that there are no amounts for adjustments or preferences on lines 7-27 of Form 6251. This simplifying assumption is not required when using the downloadable Quantrix model.

Last updated October 14, 2008