Cast Your Vote Based on Your Current Situation, Not Your Aspirations

candidates tax policyGiven that election season is in full swing, I’ve been having a lot of conversations with friends and family about the candidates and their policies.  For most, the biggest issue in the election revolves around taxes and the economy.  Personally, I think this is where the candidates have the biggest difference in policies as well.  What I’ve found interesting in my many discussions with friends and family is that what appeals to them isn’t necessarily what is best for them.  Here’s what I mean…

 

Aspirations vs. Reality

Aspiration: a hope or ambition of achieving something.

Reality: the world or state of things as they actually exist.

During my many conversations, a lot of my friends were enticed by paying less taxes.  And that makes a lot of sense.  I’m enticed by paying less taxes, and I think most people are.  However, how much you pay in taxes depends completely on your reality, not your aspirations.

I aspire to be wealthy, and would benefit from tax cuts once I achieve that level of income/wealth.  However, until I reach that point in life, I want a current tax policy that will benefit me.

My friends are all middle income earners, and so is most of my family.  Some people think they earn a lot, but even pushing $200,000 doesn’t put you in the ballpark for rich to these presidential candidates.  While we all aspire to be there someday, we are not today.

 

The Debate

The debate around taxes has been a hot button of the entire campaign, with both candidates putting out very different viewpoints.  Here are some key highlights of each candidate (based on available information from their websites and third-parties).

Obama -

  • Allow the Bush Tax Cuts to expire for top earners, raising the top 2 tax brackets to 36% and 39.6%, and raising the taxes on capital gains and dividends back to 20%
  • Keep the Bush Tax Cuts for middle income earners
  • Extend the Payroll Tax Cut
  • Index to Inflation the AMT (Alternative Minimum Tax) to avoid penalizing middle income earners
  • Tax carried interest as ordinary income
  • Restore the estate and gift taxes to 2009 levels
  • Continue tax relief for small businesses

Romney - 

  • Keep permanent the Bush Tax Cuts for all income levels
  • Repeal the AMT
  • Cut individual income tax rates by 20%, bringing the highest tax rate down to 28%
  • End or reduce certain specified tax credits and deductions: AOTC (Higher education tax credit), Child Tax Credit, Earned Income Tax Credit
  • Eliminate or reduce certain un-specified tax credits and deductions
  • Eliminate taxes on long term capital gains, interest, and dividends on middle and low income families
  • Repeal the Federal Estate Tax

As you can see, both candidates present almost opposite views on the tax situation.

 

Some Math

Let’s do some math for the sake of argument.  Take, for example, the following scenario:

Total Income: $125,000 (Includes wages, and dividends and capital gains of $5,000)

Tax Credits and Deductions: $19,000 (Includes student loan interest, mortgage interest, and several others)

Exemptions: $7,400

Taxable Income: $98,600

Under the current tax code, this family would have a tax liability of roughly $16,700, or effectively 13.4%.

 

This is how the same family would be impacted by their propsals:

Obama -

Under Obama, the only real change to the current tax policy is that the dividends and capital gains taxes would rise to 20% from the current 15%.  There may be some other expirations changing, but most of the deductions remain in place, and so taxable income would stay about the same as well.

As a result, given the same scenario, I estimate the taxes to increase to $18,800, or effectively 15.0%.

Romney -

Romney’s plan is a bit tougher to figure out, but I’m going to assume that most of the tax credits and deductions that would have been allowed before would be eliminated.  I’m assuming that the exemptions would stay.

As a result, taxable income in this situation would increase to $117,600.  However, at the same time, the marginal tax rates would fall 20%.

However, because there is more taxable income in the higher marginal rates, your total taxes would increase to $21,180, or effectively 16.9%.

 

For a breakdown of the marginal rates under each individual’s plans, check out: 2012 Tax Parameters.

 

Figuring Out Your Situation

The hardest part is figuring out your own situation so you can make an accurate choice.  There are actually a lot of resources out there to help you decide:

Other resources:

 

The Bottom Line

The bottom line is that in 2011 there were roughly 3.8 million households who earned over $200,000.

Under Obama’s policies, there is no doubt that earners in this income bracket will pay more taxes.  Even if nothing else is changed, Obamacare does raise taxes on this group.

The opposite is true for Romney – there is no doubt that earners in this income bracket will pay less in taxes if his plans are executed.

The grey area is the middle class – those earning $30,000 to $150,000 – whose policies will have the biggest benefit or biggest bite?  I’d like to think that I’m in the top tax brackets and would benefit from Romney, but I’m not, and I think his tax cut and eliminate deductions and credits will be more detrimental to my tax bill that the status quo.

 

What are your thoughts on taxes and aspirations? 

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  • http://thomassmoore.com Thomas S. Moore

    Great points Robert! I find this to be true with almost everything thats going on. Too many people listen to the fact that taxes will be raised but don’t realize that it won’t even effect them as much as they think. Hell I have friends who are complaining about capital gains taxes and they don’t even invest. I like what are you upset about. Then they hit you with the “but when I do” and I just shake my head. Thanks for the informative post I should send this to more people. I will make sure to FB like it.

    • http://thecollegeinvestor.com Robert

      I’ve never heard someone complain about capital gains that doesn’t even invest, but that proves my point exactly. How do you deal with the “but when I do” people?

  • http://www.save100k.com Jonathan

    I can see where you are coming from with this post; however, I’m personally sick of both parties using the government to vote themselves into the pockets of everyone else, in order to fund their pet projects and special interests.

    Have you watched Waiting for Superman? I watched it on NetFlix over the weekend and it made me sick to my stomach, great documentary though.

    I’m not rich BTW.

    • http://thecollegeinvestor.com Robert

      What does being rich have to do with it – you’re point about money spent on this election is spot on. I read about $1 billion has been spent across the election this year, which is ridiculous. That could be money well spent on many other programs.

  • http://www.brickbybrickinvesting.com Brick By Brick Investing | Marvin

    I believe Romney’s foreign policy is actually horrendous, however I believe our biggest threat is our debt and Romney is the perfect candidate. I don’t like Romney as a person, there’s just something about him, but I’m willing to take the chance because we cannot go another 4 years the same way we have been. I will also say that Romney’s ideas and plans have to get over various hurdles and they would make America prosper over a couple decades, but who is to say the next president won’t come in an repeal everything Romney has done.

    • http://thecollegeinvestor.com Robert

      Thanks for sharing your thoughts! Politics isn’t something many people care to share!

      So, even if the math on Romney’s plan doesn’t work out (according to most economists and tax policy experts), and the amount of taxes you personally have to pay will go up, it is still something you support?