The Tax Policy Center (TPC) has produced estimates of the individual and corporate income tax changes that representative families would face under each of the Presidential candidate’s tax plans. Estimates are available for the nonelderly unmarried, nonelderly married, and elderly. For a detailed discussion of the proposals and the sources for our modeling assumptions, see the TPC’s report A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans.
The sample families include: non-elderly single and married households with various numbers of dependents and elderly households (single and married) with no other dependents. We show selected adjusted gross income (AGI) levels between $10,000 and $2,000,000. In elderly households, the primary taxpayer (and his or her spouse, if applicable) is age 65 or older. Because the candidate’s tax plans would have different effects depending on family type, we look separately at single individuals, heads of household and married couples filing a joint return. Because Senator Obama’s “Making Work Pay” credit would be based on individual earnings, we examine both single-earner and dual-earner married couples. For dual-earner couples, we assume the higher-earning spouse receives 77 percent of wages and salaries, the average for all two-earner families in the TPC microsimulation model data. That dataset is based on information provided by the Internal Revenue Service on tax returns filed for tax year 2004 and demographic information contained in the March 2005 Current Population Survey.
Sources of Income
We assign our representative families the average amount of certain income sources for households in their income class, based on tabulations from the TPC microsimulation model database. We give non-elderly households the average amount of interest, qualifying dividends, and long-term capital gains for each AGI category and assign the remaining portion of AGI to wages and salaries. We give elderly households the average amount of interest, qualifying dividends, long-term capital gains, taxable and tax-free pensions and annuities, and Social Security benefits. We assign the remaining portion of AGI (counting only average taxable Social Security benefits and average taxable pensions and annuities) to other income. Other income is not subject to payroll taxes and is not eligible for the reduced rates on capital gains and dividends. Note that our sample elderly taxpayers do not have wage and salary income. For all elderly and nonelderly families the actual AGI used in the tax calculations may differ by one dollar from the AGI shown in the table because of rounding. Finally, because the amount of taxable Social Security benefits calculated for the individual with the average amount of each income source is not the same as the average taxable Social Security benefits, the AGI derived in the tax calculations is not exactly equal to the AGI classifier for elderly households.
The effects of both the McCain and Obama tax plans on representative families would vary over time, both because some of their proposals would phase in rather than take effect immediately and because they interact with the tax cuts that are scheduled to expire at the end of 2010. Our initial analysis shows the change in tax liability relative to current law for 2009 with all proposed provisions fully phased in. For example, we assume that the $7,000 dependent exemption in the McCain plan, which does not take full effect until 2016, would be available in 2009 as a $6,003 exemption ($7,000 in 2016 adjusted to 2009 prices).
We assume that all children qualify for the dependent exemption, the earned income tax credit, and the child tax credit. We further assume that households do not claim the dependent care credit, education credits, or the saver’s credit. We assign tentative itemized deductions to unmarried families with incomes of $50,000 or greater and married families with incomes of $75,000 or greater, based on the income distribution of itemizers in the TPC microsimulation model database. We assume tentative deductions equal to 20 percent of AGI, of which 40 percent are state and local taxes, 40 percent are mortgage interest, and 20 percent are charitable contributions based on broad averages for itemizers in 2005 IRS data. In our initial analysis, we assume that families who do not itemize under current law do not have mortgage interest. The model automatically calculates whether an itemizing family would choose not to itemize to claim Senator Obama’s proposed mortgage credit (and several families choose to do so).
We assume that the burden of the corporate income tax changes falls on the recipients of capital income (capital gains, interest, dividends, rental income, etc.); corporate tax changes show up in the form of a lower return on capital.
Note that our tables do not show the maximum potential benefit under Senator Obama’s targeted tax credits. These include his expanded and fully refundable child and dependent care credit, his American Opportunity tax credit for education expenses, and his mortgage credit for low-income families. For example, families currently receiving the maximum $1,800 Hope credit for education expenses could receive up to an additional $2,200 from Obama’s new education credit. For low-income families without tax liability who are not currently eligible for the non-refundable Hope credit, his credit could provide up to $4,000 to cover education expenses. (However, the credit would go directly to the educational institution and would not change the tax refund received by the family.) In addition, low-income families with mortgage interest could receive a credit of 10 percent of their mortgage interest (up to a maximum credit of $800). Since these credits are all refundable (that is, a direct subtraction from tax liability), it is straightforward for you to adjust the tax calculations to show their potential effect if you like.
June 20, 2008