Obama Tax Lingo

Confused about campaign tax law rhetoric?  John McCain is.  So are Republican campaigners and the right wing version of “gotcha media.”  Heck – a lot of Americans are confused.  However this time all the confusion is not a function of dementia or general stupidity.  It’s a function of the complexity of our tax laws. 

My friend Ann Marie posted some comments and a link to an article in the comment section of my post titled The Fear Vote.   These comments express frustration with perceived inconsistencies flowing from the Obama campaign regarding proposed tax law changes.  I was going to respond with a comment myself, but this is such an important topic that I deemed it worthy of a separate post.  This way I can educate more people instead of having my thoughts buried in the unread annals of blog commentary.

This is important because the struggling global economy is one of the most important issues of this presidential election.  U.S. tax laws are a major factor affecting our economy.  Economics is an area where McCain has acknowledged weakness and he has a disturbing track record, so it’s not surprising that he is confused.  The Obama campaign didn’t do themselves any favors by choosing to highlight similar but distinctively different statistical tax law projections.  However, I submit that the Obama campaign has been consistent in their message.  You just have to pay attention.

I pay attention to tax law rhetoric in a way that the average person does not.  I’m guessing it’s a function of my day job.  The Obama campaign may or may not be able to clear up some of the confusion over the next couple of days because they are kinda busy trying to get their guy elected, so I’m willing to give it a shot. 

As noted in prior posts – I don’t agree with all of Obama’s proposed tax law changes, but I do think his proposals are far more responsible and better for the overall economy than the continued lunacy proposed by the Republicans.  Whether you agree with Obama’s proposals or not, the key to understanding them is to pay attention to some key words and phrases.  I’m not about to completely rehash the competing tax proposals, but I would like to help clear up the confusion regarding tax cuts for incomes under $250,000/$200,000/$150,000.  So here goes…

“FAMILIES” Making Less Than $250,000.  The key word is families.  Obama’s campaign has been consistent in saying that families making less than $250k will not see a tax increase and families making less than $200k will get a tax cut.  Families does not include single, middle-aged, curmudgeonly, balding men/women with cats.  (So I guess I’m screwed – and so is my friend Ann Marie.  Although she is not balding, so she’s got that going for her.)  Families implies dependents, which means a spouse or children.  The cuts they refer to are a function of increased exemptions and credits related to the children.  Also in the mix are increased credits for education and adjusted tax rates for all taxpayers.  Several of the proposed changes won’t affect people like me and they won’t affect seniors.  Furthermore, this statement indicates that families under $250k won’t see an increase.  They also might not see a decrease.  Under $200k – they would see a decrease.

“WORKING AMERICANS” Making Less Than $200,000.  Working Americans includes many families but it also includes people like me.  What about non-working Americans?  Buzzzt.  Not talking about you here.  So if you happen to have large amounts of investment income, passive income, retirement income or other income not associated with currently working then you aren’t in this category.  Working Americans addresses people with earned income subject to FICA taxes or self-employment taxes.  The demographics of this category are potentially very different from families. 

Ok, so far ALL families with income under $250k will not see a tax increase and ALL families AND working Americans with income under $200k will see a tax cut.  So who is left out?  Well, the biggest category that jumps to mind is senior citizens – but they aren’t forgotten.

“MIDDLE CLASS PEOPLE” Making Less Than $150,000.  This one bugs me a little because “middle class” is not necessarily a function of taxable income.  I believe you also have to look at assets, debt and other factors.  A non-working homeless person is clearly not middle class, but what about a nonworking individual with a beautiful home and significant assets invested in such a way as to defer most tax effects?  Are they middle class?  Maybe upper class?  My point is that you can’t just look at how much income someone makes.  And what about that word “making”?  Does “making” income mean “earned income” or does it include investment income and all the other subcategories of taxable income?  I will now stop being an overly analytical geek accountant. 

I believe the intent of this phrase was to include ALL TAXPAYERS with ADJUSTED GROSS INCOME under $150,000.  Families, singles, workers, non-workers, seniors…  EVERYBODY who files a tax return with AGI under $150k should get a tax break under the Obama tax plan.  Huzzah! 

So, there is the difference between the $250,000/$200,000/$150,000 figures the Obama campaign uses.  It depends on if you are talking about families, working Americans, or all taxpayers.

Roughly 95% of ALL tax returns show adjusted gross income under $150,000.  What about just the families?  I’m not sure, but I could see how 95% of that subcategory of taxpayers could be under $250,000. 

It’s all very confusing.  I’ve been preparing tax returns for over 20 years and tax law gets more confusing with each passing year.  Even in election years when candidates talk about tax simplification we don’t actually get any.  Interesting how both parties have given up on this concept for now.  I don’t think I’ve heard the words “tax simplification” from a politician in years. 

Earned income, investment income, passive income, capital gains income, adjustments, deductions, credits, AMT… ahhhh!!!  I doubt Barack Obama understands all the nuances of tax law.  Many tax accountants with years of experience sometimes have a hard time.  The promises from the Obama campaign are based on estimates, projections, statistical analysis and tax law proposals designed by learned advisors.  Obama just put his “okie dokie” on those proposals and promises to try to get there. 

Every American should know by now that the details associated with these types of election year campaign promises never actually become law in their current form.  Congressional subcommittees, special interests, lobbyists, and many others will stick their thumb in the pie.  However, Obama’s tax law proposals are more fiscally responsible than McCain’s and I do believe that he can get laws passed that will reduce taxes for families and working Americans with incomes under $200,000 and ALL taxpayers with incomes under $150,000.

Obama’s message on taxes is consistent even if it is sometimes confusing.  McCain is just confused.