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If GOP presidential nominee John McCain and his Democratic counterpart, Barack Obama, ever find themselves on the same side of a policy argument, it likely won't be a discussion about federal tax policy.

Tax policy remains a battleground, and the differences between the two major party candidates' tax reform proposals reflect their two very distinctive views of the federal government and its role in the lives of American taxpayers.

This week, BIZ is publishing the first of four articles that look more deeply at the candidates' positions on major issues of the day. In the coming weeks, we'll be back with articles contrasting the candidates' approaches to health care, energy and trade.

"We hope these articles comparing the two major presidential candidates will give our members and LGBT business owners a sense of where the two candidates stand on some of the central issues of our time," says Justin Nelson, co-founder and president of the National Gay & Lesbian Chamber of Commerce. "These policy questions will help define the next president, and we feel it's essential our members be informed about where the candidates stand on these issues as they go to the polls."

A review of the candidates' strategies on federal tax policy reveals that both have retained their parties' tax-policy underpinnings, though each has tinkered around the edges to make their policies their own.

Obama's economic philosophy, as he described it to The New York Times, is built on a "moral" capitalism—a belief that government plays an essential role in regulating the marketplace to reflect society's greater concerns. The best example of this is Obama's proposal to enact a windfall profits tax on oil companies. While it defies traditional free-market thinking, the tax proposal reverses a policy that provides what some consider unjustifiable tax breaks for energy companies while they are experiencing record profits in a struggling economy.

McCain has reaffirmed his reputation as a reformer on tax questions, proposing an ambitious agenda to discourage corporate lobbying for incentives and tax breaks. Yet he stands with the Bush administration on extending the 2001 and 2003 tax cuts, which includes corporate tax breaks as well as those for families, such as the marriage penalty relief and higher child tax credits.

Income Tax

Obama's plan would extend the Bush tax breaks that are targeted to lower-income families, such as the child tax credit, marriage penalty relief and lower tax rates. The plan would, however, exempt households earning $250,000 or more annually from the extension. On average, there would be an annual net savings of $900 for households. Obama's plan also recognizes that the payroll tax—not the income tax—takes the biggest bite out of the incomes of lower-income families, and would provide a $500 income-tax credit to offset payroll taxes already paid. Obama would eliminate the tax reductions enacted during the Bush administration, which would affect individuals, small business and corporate taxpayers across the board.

McCain would extend the Bush tax breaks enacted in 2001 and 2003, thus continuing the level of deductions for taxpayers with children, reducing the corporate income tax rate, and allowing immediate deductions for investments in certain capital equipment. His income-tax reduction plan would lower taxes by 2.5 percent for those earning between $111,646 and $227,000, and by 4.4 percent for the 147,000 U.S. taxpayers earning more than $2.87 million annually. For households with incomes below $112,000, McCain's plan would reduce taxes 0.2 percent and 1.4 percent. On average, his plan would produce an annual net savings of $200 for households.

Meanwhile, Obama would increase income taxes for the top 0.1 per cent (above $2.87 million) by nearly 11.5 percent. For those earning between $603,400 and $2.87 million, the rate would climb by 8.7 percent. Rates would fall significantly for lower-income households. Tax rates for those earning $66,000 or below would drop between 2.4 and 5.5 percent, compared to a 1.8 percent to 2.1 percent reduction for those earning between $66,000 and $227,000.

Corporate Income Tax

A key emphasis of McCain's tax policy is the business sector. McCain has promised to cut the maximum corporate income tax rate from the current 35 percent to 25 percent, which will result in a significant tax break for the larger businesses. Small businesses structured as S corporations would likely not be impacted by this reduction.

Obama would not change the corporate income tax.

Capital Gains Tax

The capital gains tax rate on long-term gains is currently 15 percent, or 5 percent for individuals in the lowest two income tax brackets. Obama's plan would increase taxes on dividends from the current 15 percent to 20 percent for those making more than $250,000. McCain favors maintaining the current rate.

Estate Tax

If the 2001 tax cuts are allowed to expire in 2011, the estate tax exemption will drop to $1 million and the top estate tax rate to 55 percent. Both candidates have proposed increasing the estate tax exemption and reducing the estate tax rate, but at different levels.

Obama proposes freezing the estate tax at 2009 levels: a 45 percent tax rate on estates valued at more than $3.5 million. Under this plan, married couples can combine their exemptions for a total of $7 million. Obama's tax proposal would apply the estate tax to about 8,000 estates in 2011.

McCain's plan calls for a much more dramatic cut. He favors a 15 percent tax rate, and an individual exemption of $5 million ($10 million for married couples). Under McCain's proposal, only about 4,000 estates would be subject to tax in 2011—less than 1 percent of all estates in the United States.

Tax Cuts and the Budget Deficit

Economists say that both candidates' tax plans will cause budget deficits, with the potential of harming the economy and trimming government spending on public infrastructure in the long and short terms.

Both McCain and Obama have promised to offset the deficit with spending cuts. McCain emphasizes cutting earmarks for pork barrel projects and eliminating wasteful spending; Obama wants to reduce spending on the war. But their plans lack key details about all the measures they would take to stop the federal deficit from ballooning over the next five years.

TPC found that Obama's tax-reduction plan would increase the national debt by $3.5 trillion by 2018. McCain's plan to leave the Bush administration's existing tax cuts in place rather than let them expire would add $5 trillion to the debt.

The non-partisan Congressional Budget Office (CBO) offers a bleak forecast, projecting a record deficit of $438 billion in the coming year due to the slowing economy, which would also decrease tax revenues. The CBO has said that the deficit is a result of decreased tax revenues and increased federal spending over the past several years—something the next president will have to take into consideration as he moves forward on any tax-reduction plans.

Sources:

1. Tax Policy Center Report [http://www.taxpolicycenter.org/publications/url.cfm?ID=411749]

2. Knowledge@Wharton, "The Candidates on Taxes: Finding the Devil in the Details [http://knowledge.wharton.upenn.edu/article.cfm?articleid=2043]

3. Gerard, Keith, "SMBs Must Look Beyond Platitudes and Their Party on Tax Policies" [http://www.allbusiness.com/government/elections-politics-politics-political-parties/11493622-1.html]

4. Leonhardt, David, "Obamanomics," The New York Times, August 24, 2008