As I sat late Tuesday evening on November 4^th watching the President Elect, Barack Obama, deliver his victory speech, a reality became apparent that the Bush administration is actually approaching its close and a new administration will be entering Washington.

It’s hard to believe that eight years have passed so quickly and also, as I reflect, that such an incredible number of historic tax law changes were enacted throughout Bush’s term. From tax rate cuts to Alternative Minimum Tax (AMT) relief to economic stimulus packages, the past eight years have been an extremely active time in taxation. As the country enters its next presidential term under new leadership, tax policy will undergo significant change.

One challenge for the new administration is the daunting task of balancing taxation with the government’s commitment to fiscal and social responsibility. If it reduces taxes, vital government programs face cuts, while an increase in taxes would result in a reduction of consumer and corporate spending, thus hampering the economy. President Elect Obama has addressed this dilemma by offering to reduce taxes to families making under $250,000 per year and subsidizing this reduction with increases to families making over $250,000 per year, a reduction of government spending and the elimination of abusive tax loopholes.

Under Mr. Obama’s plan, the following tax incentives are highlighted.

Middle Class Incentives (under $250,000/family)

- Tax credits of up to $1,000 for workers

- A $4,000 refundable credit for qualified tuition expenses

- A 10% refundable credit for mortgage interest payments

- Eliminate income tax for seniors making under $50,000

- Expand Earned Income Credit, child care credits, clean vehicle credits and retirement savings incentives

Business Incentives

- Elimination of capital gains tax on investors in small businesses

- Cutting corporate tax rates for companies creating jobs in the US

- 50% refundable credit for small businesses paying employee premiums

- Making the Research and Development Credit permanent

On the flip side, Mr. Obama’s plan includes the following tax increases and reform:

Tax Increases to Families Exceeding $250,000 and an adjustment to Estate Tax

- Top tiered income tax rates restored to pre-Bush levels of 36% and 39.6%

- Long-term capital gain tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Qualified dividend tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Estate tax will retain a rate 0f 45% for those estates over $7M

Tax Reform

- Reforming international tax loopholes by eliminating incentives for shipping jobs overseas

- Closing domestic tax loopholes by clarifying the economic substance doctrine and increasing reporting on capital gains

- Elimination of tax incentives of oil and gas companies

- Closing other loopholes such as taxing carried interest as ordinary income and closing the CEO pay loophole

- Increase in the investigation of offshore tax havens

As evidenced by the items above, it’s easy to conclude that embodied in Mr. Obama’s plan is an underlying (and well-publicized) theme of “redistribution of wealth.” The goal is primarily to lessen the gap between the middle class and upper class — a gap that has widened to historic proportions under President Bush’s administration. Using AMT as an example, a number of middle class taxpayers become subject to a tax that was intended for the wealthy, thus subsequently forcing temporary patches included in various economic stimulus packages.

“Change” was the theme of Mr. Obama’s campaign and this will be what we can expect with taxation. We also should keep in mind that regardless of the items listed above, it is likely that events will occur that can drastically change his comprehensive tax plan. We only have to look as far back as the changes enacted by the Bush administration, and certainly we don’t need to be reminded of the famous words uttered by the elder George H.W. Bush that helped him win the 1988 presidential election.  Luckily, we were not very good lip readers.

This entry was posted on Wednesday, November 12th, 2008 at 9:28 pm and is filed under Accounting, Economic Stimulus, General Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.