2012 Presidential Candidates Roll Out Tax Reform Proposals
Simplified flat tax . . . a common theme.
November 10, 2011
The Republican Presidential Primary race is in full swing. And the bi-partisan Super Committee is still attempting to hammer out a compromise deal to reduce our ballooning federal deficit by the Thanksgiving deadline.
Currently, the four leading Republican candidates are (in alphabetical order) businessman Herman Cain, former House Speaker Newt Gingrich, three-term Texas Governor Rick Perry and former Massachusetts Governor Mitt Romney. Cain, Gingrich and Perry are all calling for a more radical reform of the current federal tax code, albeit in differing ways, while Romney is in favor of a more conservative tax overhaul. Each candidate’s tax plan is outlined as follows:
Corporate Tax Rate
The current federal corporate tax rates generally start at 15 percent and can go as high as 38 percent for companies with taxable income over $15 million. The average corporate tax rates in other countries averages approximately 20 percent.
- Cain’s proposal, dubbed the “9-9-9 Plan” calls for replacing the current marginal corporate tax rate (between 15% and 38%) with a nine-percent flat corporate income-tax rate on corporate net income, which would generally be based on gross income less investments, third-party purchases and dividends to shareholders. Cain also proposes the elimination of payroll taxes.
- Former Speaker Gingrich suggests a 12.5 percent corporate income tax rate to encourage American entrepreneurship.
- In Governor Perry’s recently announced “Cut, Balance & Grow” plan, he recommends a 20 percent flat corporate tax rate on domestic earnings. One interesting aspect of the Perry plan is that he would temporarily retain the current corporate income-tax system allowing taxpayers to opt either the flat rate system or the current graduated rate system.
- Governor Romney’s 59-point jobs plan seeks to lower the corporate tax rate to 25 percent.
National Sales Tax
- Cain’s proposal calls for a flat nine-percent sales-tax rate. This would represent a new source for the federal government as, currently, the sales tax is only imposed by state and local governments. Opponents argue that this creates a very regressive burden on the poor and middle-income taxpayers.
- Gingrich, Perry and Romney have not incorporated a sales tax into their current proposals.
Taxability of Offshore Earnings
Currently, foreign earnings are generally only taxed in the U.S. when the profits are repatriated (e.g. brought onshore to the U.S.):
- Cain’s proposal includes a provision to eliminate U.S. taxation on repatriated earnings.
- Gingrich’s approach is to tax offshore profits at the same corporate-tax rate as domestic income in the year earned.
- Similarly, Perry wants to institute a “territorial” tax system, under which companies would simply pay the foreign rate on overseas profits, without a secondary U.S. tax imposed when the earnings are repatriated. The rate on repatriation of existing earnings would temporarily be 5.25 percent.
- Like Perry, Romney would also institute a territorial-tax system.
Personal Tax Rates
- Not surprisingly Cain’s final “9” in his 9-9-9 Plan calls for a flat nine percent personal income-tax rate. There would be no tax on capital gains under the plan.
- Gingrich proposes an optional flat tax system with a 15-percent tax rate. Taxpayers would have the option of paying the flat tax based on income or the current progressive tax system with marginal rates ranging from 10 percent to 35 percent. Also, tax on interest, dividends and capital gains would be eliminated.
- Perry also offers an optional flat tax system, but at a higher rate of 20 percent. Tax on interest, dividends and capital gains would also be eliminated, but only if the capital gains meet the long-term holding period of more than
- Romney promises to keep individual income-tax rates as is, but eliminates the imposition of federal tax on interest, dividends and capital gains for low- and middle-income taxpayers making less than $200,000 annually.
Personal Tax Deductions
- Cain proposes retaining only the charitable contribution deduction, but also would like to see the expanded use of Federal Empowerment Zone deductions for individuals living in or working in specially designated economically challenged areas.
- Gingrich offers to maintain deductions for charitable giving and home ownership for all taxpayers without any income limitation. While state- and local-tax deductions would no longer be allowed, there would be a $12,000 personal deduction for every individual.
- Perry’s plan preserves the mortgage interest deduction, charitable deduction and state- and local-tax exemptions only for families earning less than $500,000 per year. A personal deduction of $12,500 would be allowed for each individual and their dependents.
- Romney proposes leaving the current statutory deductions in place.
Estate Taxes: A Consensus
All candidates support complete elimination of the federal estate tax.
What About the Democratic Proposals?
As a general comparison, President Obama and many Democrats have been lobbying for higher taxes for the wealthy. In addition to promoting that the Bush Tax Reductions from 2001 (which were extended late last year) should expire, in which case the maximum rates on individuals would increase to 39.6 percent and long-term capital-gains rates would increase to 20 percent from their current 15-percent rate, the Obama Administration has also called for the so-called “Buffett Tax”, named after Warren Buffett (the third richest man in the world), which will levy an even higher tax rate on taxpayers making more than $1 million.
The Super Committee — Where They Stand
The “Super Committee” was established as part of the federal borrowing limit debate earlier this year. As part of that contentious process, congressional leaders agreed to establish a bi-partisan 12-person committee. To the extent at least $1.5 trillion of additional deficit reductions are not agreed to by Thanksgiving, automatic spending cuts of $1.2 trillion will be implemented over the next 10 years, beginning in 2013.
While the Democrats were proposing a $2.5 trillion to $3 trillion deficit reduction over 10 years, the Republicans preferred an overall reduction in the $2 trillion range at the end of October. In early November, both parties were leaning towards a $4 trillion deficit reduction.
The Democrats are proposing at least $400 billion in discretionary spending cuts — $200 billion in defense spending with the balance in other programs and personnel reductions. The Republicans currently prefer no defense cuts and are focusing the majority of the cuts on federal employee costs.
The Democrats are targeting $1 trillion or more in additional revenue through various tax increases, including rate increases on the wealthy. As reflected above, the Republicans are pushing hard for tax reductions and are therefore relying on expected economic recovery resulting from the rate reductions to increase the overall tax receipts for the country. Current tax increases projected in the Republican plan are in the $200 billion range.
Democrats are requesting infrastructure and other job creation stimulus in the $200 billion to $300 billion range, while the Republicans prefer not to include any direct stimulus programs in the Super Committee package.
Social Security Reform
The Super Committee members have developed a rare consensus on this issue and rather than making any major structural changes, they are simply proposing to modify how the annual cost-of-living adjustments are made to benefits.
Medicare and Medicaid
The Republicans have taken the lead on these provisions and have proposed total decreases in the $685 billion range to $500 billion from Medicare and $185 billion in Medicaid cuts. The Democrats are still working through their provisions, but are in general agreement on several of the Republican proposals.
The next 12 months will be a very interesting period as the presidential race and these tax proposals evolve.
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