Obama Sticking To Guns On Tax

by Mike Godfrey, Tax-News.com, Washington

31 December 2008

United States President-elect, Barack Obama, intends to follow through with his election campaign pledge to cut individual income tax for low- and middle-income Americans next year despite the deteriorating economy, according to his chief advisor.

David Axelrod, who was chief strategist for Obama's 2008 presidential campaign and has since been appointed as his senior advisor, revealed during interviews broadcast by US television news channels at the weekend that elements of Obama's tax cut proposals will form part of an economic stimulus plan currently being worked on by Congress and the transitional team.

Earlier in the month it seemed that Obama had relegated his tax plans down the legislative agenda as all the economic signals began to point towards a deep and prolonged recession in the United States. In response, he outlined an ambitious recovery plan centred on a massive cash injection to America's infrastructure which appeared to leave little room for tax cuts. However, Axlerod suggested that individual income tax cuts will also figure in the temporary stimulus plan, and these could be permanently cemented into place when Obama announces his first budget as president later next year. Axelrod also confirmed that the Obama administration would go through with a campaign plan to allow those parts of the temporary tax cuts passed under the Bush presidency which benefit wealthy taxpayers to expire at the end of 2010. They could even be repealed earlier if the new administration deems it expedient to do so.

It has been suggested that the stimulus tax cuts will be worth USD500 per individual and USD1,000 per married couple. But unlike the rebate checks which buttressed the first economic stimulus package signed by President Bush in February, the new tax cuts could be delivered more directly by reducing the amount of an individual's income that is withheld in tax. It is thought that this would have a more immediate impact on consumer spending.

By the end of November, the Treasury Department had dispersed a total of USD96.13bn in rebate payments, but it is estimated that Obama's stimulus tax cuts will cost in the order of USD140bn over two years. Overall, the stimulus package is expected to cost somewhere in the region of USD600bn to USD800bn, and could push the federal deficit over USD1 trillion.

Prior to his November 4 victory at the polls, Obama campaigned to increase the top rate of income tax to 36.9% from its current level of 35% (which has been in force since Bush's first round of temporary tax cuts in 2001). Obama also proposed to restore capital gains tax to its pre-2001 level for those on high incomes. However, he has promised that all taxpayers making less than USD250,000 per year will see their income taxes cut, and he has maintained that, overall, his tax plan represents a net tax cut, rather than an increase in the individual income tax burden.

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