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Obama's tax policies
Brian Wingfield, Forbes

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November 04, 2008

Here are two things you don't often hear mentioned in the same sentence: Democratic presidential candidate Barack Obama and a lower corporate tax rate. But it appears the Illinois senator is at least considering such a measure.

"He would like to cut the corporate tax rate, and it's a question that we're studying," Jason Furman, Obama's director of economic policy, told in an interview this week.

Obama's Republican rival, Arizona Sen. John McCain, proposes to lower the maximum corporate tax rate from 35% to 25% . Obama hasn't made such a pledge, and Furman won't say by how much or when Obama might slash corporate tax rates. But if it does happen, Furman says, "It'll be much better for the economy and much better for businesses than what John McCain has proposed."

Before businesses get too excited, Furman says it's important first to resolve some of the "underlying problems" in the corporate tax code, which he believes is too complicated. Examples: different tax rates on companies that are financed through debt rather than equity, different rates on overseas and domestic investment and other tax loopholes for certain industries, like oil and natural gas.

"If you fix a lot of those problems, you can bring the tax rate on corporations down," says Furman. But bringing the tax rate down first, he explains, raises deficits, and would result in a weaker economy.

Following a whirlwind foreign tour last week, Obama turned his focus to the economy, meeting with a marquee cast of economic gurus, including former Federal Reserve Chairman Paul Volcker, several former Treasury secretaries and billionaire Warren Buffett on Monday. Tuesday, he spoke with current Treasury Secretary Henry Paulson and met with Fed Chairman Ben Bernanke.

Furman says he'll gather this all-star advisory panel (the Monday group), or something like it, "ideally more than once before the election."

Furman, who was named Obama's top economic adviser just two months ago, specializes in fiscal policy issues, but says Obama "is his (own0 best economic adviser."

Last week, the Tax Policy Center, a think tank affiliated with Furman's previous employer, the Brookings Institution, released its second analysis of the candidates' tax plans. The analysis says Obama's plan "as described by his economic advisers" would boost the national debt by $3.4 trillion by 2018. McCain's plan would drive it to $5 trillion over the same period.

To compound the issue, the White House projected Monday that the budget deficit will reach a record $482 billion in fiscal year 2009, largely due to the recent fiscal stimulus package and the sluggish economy. Obama is calling for a second, $50 billion stimulus.

Both campaigns dispute the Tax Policy Center's estimates, saying the study doesn't include the effects of their proposed spending cuts and that any estimates should be based on current policy--which includes the set-to-expire 2001 and 2003 tax cuts--not current law. Furman says even with the $50 billion stimulus, Obama's plan "lowers the debt relative to what would happen if we continued on our current policy."

Other aspects of Obama's economic plan include a payroll tax surcharge on people who earn more than $250,000 annually; a dividend tax rate of "somewhere between 20% and 28%," according to Furman; an income tax exclusion for seniors making less than $50,000; and an increase in the maximum capital gains rate from 15% to 25%.

Why should there be an increase on capital gains? Because, Furman says, the US has a large budget deficit and because the country needs to invest more in health care. Obama has proposed to make low-cost health insurance widely available, particularly for children.

Furman says there's no evidence the U.S. can't have strong economic growth if the capital gains rate were to be increased "to something that would still be well below what Ronald Reagan raised it to." During the Reagan administration, the rate was as high as 28%.

But Obama might not get the chance. For all the attention the candidates' tax proposals have received in recent weeks, there's still a serious potential obstacle: A massive tax overhaul introduced last fall by House Ways & Means Committee Chairman Charles Rangel, D-N.Y.

Rangel's proposal, which pays for itself, would permanently abolish the Alternative Minimum Tax and impose a 4% surtax on individuals who make more than $200,000 annually. It would also lower the maximum corporate tax rate to 30.5%.

It seems logical that a Democratic president would have an easy time getting his tax plan through a Democrat-controlled Congress. Maybe not.

Furman says Obama is "not in favor of" Rangel's plan. "You couldn't combine the Obama health plan and the Rangel tax plan and put them together in one package," he says. "It just wouldn't work."

Rangel says he and Obama "share many of the same priorities with regard to tax policy," such as tax relief for the middle class and tax fairness. He also wants to simplify the tax code. But that's no guarantee the two won't butt heads on tax issues if Obama wins in November.

Sounds like Obama might need to reconvene his all-star economic brain trust sooner than expected.

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