US Republican candidates vie on tax cuts
13 February 2012
Both the leading candidates for the Republican
nomination in this year's US presidential election say they will
abolish estate tax and freeze the top rate of income tax.
Most election years see the Republican
hopefuls promising tax reductions. They offer the double bonus of
pleasing taxpayers and of promoting the party's traditional
opposition to "big government". However, taxes are especially high
up the political agenda in this year's election, partly because the
economic downturn has kept political discussion focussed on the
elusive recovery, partly because of the controversy over
"fairness", and partly because historical factors have created
instability in the US tax system.
Both estate tax and income tax are in a
transition period caused by the expiry of the "Bush tax cuts" - a
decade-long programme of tax reductions enacted by the Bush
administration in the early 2000s. If they are allowed to expire,
the top rate of ordinary income tax would leap from 35 to 39.6 per
cent on 1 January 2013. The 15 per cent concessionary rate for
qualified dividends would be abolished and long-term capital gains
tax would rise from 15 to 20 per cent. Federal estate tax,
currently 35 per cent, would return to 55 per cent.
Neither of the two leading Republicans, Newt
Gingrich and Mitt Romney, propose to let this happen; they would
continue the Bush programme. Moreover, both would also lower the
cap on corporate income tax from the current 35 per cent to 12.5
per cent, and switch international taxation to a territorial system
under which the US does not tax corporate income repatriated from
an overseas affiliate if it has already been taxed in the country
where it was earned.
However, Newt Gingrich is also proposing a
dramatic reform under which each taxpayer can opt for a flat 15 per
cent income tax to replace all other taxes. According to Tony
Nitti, a partner at WithumSmith Brown, this is a critical part of
the Gingrich tax platform. Under the plan, says Nitti, taxpayers
could "elect to forego the complexities of the [US Tax] Code in
favour of a flat 15 per cent tax rate regardless of income".
Capital gains, interest income, and dividends would all be
tax-free. Almost all deductions and credits would also be
abolished, although allowances for charitable contributions and
foreign tax credits would be retained. "Gingrich's idea is to
create simplicity", says Nitti, who notes professional fees for tax
advisers would also suffer.
The famous economist Arthur Laffer, of curve
fame, has backed Gingrich's plan. "It doesn't get any better than
Mr. Gingrich's optional 15 per cent flat tax for individuals and
his 12.5 per cent flat tax for business", he wrote in an column in
the Wall Street Journal. "Each of these taxes has been tried and
tested and found to be enormously successful. Hong Kong, where
there has been a 15 per cent flat income tax on individuals since
1947, is truly a shining city on the hill and one of the most
prosperous cities in history."
Romney has nothing so revolutionary, but
proposes to exempt everyone whose gross annual income is less than
$200,000 from tax on capital gains, qualified dividends and
interest payments. Those with higher incomes would pay the current
ordinary rates.
On the Democrat side, the policy of incumbent
president Barack Obama is to continue the Bush tax cuts for those
on incomes below than $250,000, but allow those for the wealthy to
expire. He is also proposing a "Buffett rule requiring those on $1
million a year or more to pay " at least 30 percent of their income
in federal tax. However, even Obama's supporters say this would
require legislation that Republicans will never allow through the
Senate.
"Some sort of compromise will be necessary to
avoid a fairly large de facto tax increase on 1 January [2013] if
no action is taken", says former politician and tax expert Bruce
Bartlett. "There is no possibility, given the electoral situation,
that the 2013 tax situation is going to be resolved before the
election. Whether it's resolved afterwards depends on the election
results."
Sources
WithumSmith Brown
Wall Street Journal (Laffer comment)
The Fiscal Times