Tax changes ahead, no matter who wins

But McCain and Obama differ on what to do when Bush cuts expire

WASHINGTON -- Regardless of who wins the White House in an election where everyone talks about change, there's one change America can count on: taxes.

The fact that President Bush and Congress enacted temporary tax cuts in 2001 and 2003 that expire at the end of 2010 means it's inevitable that taxes will change, perhaps dramatically.

The next president and Congress will agree to extend some or all of those tax cuts while also cutting or raising other taxes -- or else political gridlock will stymie agreement, the tax cuts will expire, and tax bills will go up for almost everyone.

"It is a unique moment," said Robert Reischauer, former director of the Congressional Budget Office. "Something has to happen."

But what? Who will pay less and who will pay more? Which plan will get through a Congress that is likely to remain in Democratic control?

The ideas with the best chance are those few changes that Democrat Barack Obama and Republican John McCain both want.

McCain and Obama both want to extend the Bush tax cuts for those making less than $250,000 -- mainly the $1,000 per child tax credit, lower income tax rates and elimination of the marriage penalty.

"There's a good chance that whoever the next president is, the Congress will agree to extend the middle-class tax cuts," said Leonard Burman, director of the Tax Policy Center, a joint operation of the Urban Institute and Brookings Institution that analyzes taxes. Both are center-left think tanks.

"The candidates want it, and majorities in both houses of Congress favor it," Burman said.

Beyond that, however, Obama and McCain differ greatly.

A progressive plan

Obama's goal is to make the tax system more progressive, Burman said, letting the working poor and middle class pay less and making the wealthy pay more. His goal, however, could be compromised if he raises tax rates on the wealthy so much that he drives them to hide income and they essentially end up paying less tax, not more.

At the bottom of the economic ladder, Obama would give money to the working poor by making more tax credits "refundable," meaning people would get a check for any tax credit left over after the income tax bill had been covered.

A new "Making Work Pay" tax credit, for example, would give a credit or check for up to $1,000 to a couple making $16,200 a year.

For middle-income earners, Obama proposes new tax cuts including an increased credit for college costs, expansion of the Earned Income Tax Credit to more families, and elimination of income taxes for senior citizens who make less than $50,000 a year. He would extend the Bush tax cuts for single taxpayers making less than $200,000 and couples earning less than $250,000.

At the top, Obama wants to let the Bush tax cuts expire as planned for singles making more than $200,000 a year and couples earning more than $250,000. He also would make those high earners pay additional taxes for Social Security.

In some high-tax areas such as New York, these changes could push the total tax burden beyond 50 percent, Burman said. That would be the highest since the late 1970s and could drive the wealthy to more aggressively hide income from taxes.

But as president, Obama might not get his way even with a Democratic Congress.

Obama wouldn't need to do anything to raise income tax rates on the top earners. That would happen automatically at the end of 2010.

But he would need to get Congress' approval if he wanted to enact the tax increases in 2009, and might have a hard time getting the 60 votes needed in the Senate.

Spur economic growth

McCain's goal is to spur economic growth, Burman said.

McCain's hopes could be compromised, however, if rising federal budget deficits push interest rates higher, Burman said.

McCain's plan would extend all of the Bush tax cuts, including those for people making more than $250,000. He also would cut the top corporate tax rate from 35 percent to 25 percent.

His biggest challenge would be getting a Democratic Congress to agree to extend the tax cuts for those making more than $250,000.

"That would be one of the hardest things for him to accomplish," said Michael Franc, a congressional scholar at the Heritage Foundation, a right-of-center think tank. "The hard part is that the default of gridlock is higher taxes for everybody. If he uses a veto strategy [threatening to veto any tax plan that doesn't include tax cuts for the wealthy], all the tax cuts go away. He'd be at an inherent disadvantage negotiating with Congress."