Senator’s Tax Plan May Not Raise All He Expects

For Sen. John F. Kerry’s household, the price of winning the presidency could be nearly $250,000 a year in higher taxes.

Or not.

The Democratic nominee wants to raise taxes on capital gains and dividend rates for families and individuals making more than $200,000 annually. He also wants to raise the top income tax bracket, now 35%, to 39.6%.

The Massachusetts senator says these changes would raise about $229 billion over the next 10 years that could be used for education and healthcare. But critics question those projections, saying that efforts to tax the rich often fall short as wealthy Americans and their accountants find ingenious ways to keep their income from Uncle Sam’s reach.

Even though many loopholes were closed with tax reform legislation in 1986 and other measures since then, there are still plenty of strategies for the well-off to tamp down their tax bills.

“Proposals to raise taxes don’t raise anywhere near as much as you’d hope because people rearrange their finances to avoid the higher tax,” said Daniel Feenberg, research associate at the National Bureau of Economic Research, a nonpartisan economic research group based in Cambridge, Mass.

In 1993, for example, higher federal income taxes on the wealthiest Americans generated only 30% to 40% of the projected revenue, according to a study coauthored by Feenberg.

Financial statements filed by Kerry and his wife, billionaire Teresa Heinz Kerry, offer clues to how the rich might find ways around his proposed tax hikes, as do the returns filed by President Bush and his wife, Laura.

As president, Kerry would earn a salary of $400,000 -- slightly more than what he earned last year, which in addition to his $154,700 Senate salary included $145,805 from his sale of a half-interest in an Adam Willaerts painting and $89,200 in royalties from his book “A Call to Service: My Vision for a Better America.”

If he generated no other income beyond his salary, Kerry’s taxes would rise by about $19,000 -- from $100,332 to about $118,811 -- under his proposed tax hike, according to CCH Inc., a Riverwoods, Ill.-based tax research and consulting firm. CCH was one of three tax specialists that agreed to examine the candidates’ returns and tax-saving options at The Times’ request.

Although Kerry could do little to shelter his salaried income, experts said, he could take steps to keep his tax bill down. One simple way: by not selling off any investments or assets.

“One of the things you can do with wealth and investments is decide when you are going to dispose of them,” noted Santa Monica tax attorney Philip J. Holthouse. “You don’t pay tax until you sell.”

Heinz Kerry would have many more options to reduce a tax hit, said George McCrimlisk, partner in the personal financial planning group at KPMG.

Although she has not yet released a copy of her 2003 return, Heinz Kerry said in May that she had income of $5.1 million last year. She didn’t pay taxes on more than half of those earnings: the $2.8 million that came from her massive portfolio of tax-free municipal bonds.

Under her husband’s tax plan, Heinz Kerry would pay about $225,000 more on the $2.3 million in taxable income she received last year, Holthouse estimated. But she could avoid paying at least a portion of that additional tax by shifting stocks and other holdings into more tax-free municipal bonds.

Another tax-trimming option would be to buy stocks that don’t pay dividends.

Bush cut the tax rate on dividends to 15%, making dividend-paying companies hot commodities on Wall Street. But Kerry said he wanted to tax dividends at ordinary income tax rates (up to 39.65%) for people making more than $200,000.

By buying and holding stocks that don’t pay dividends, Heinz Kerry could avoid dividend income and defer recognizing any gains until she sold the stock, possibly in a lower-tax administration.

It’s impossible to accurately predict how much Heinz Kerry could avoid paying with these tactics without seeing Heinz Kerry’s returns, which she has pledged to release this month, the tax experts said.

A Heinz Kerry spokeswoman declined to discuss her tax strategies. A spokesman for Kerry, however, said the candidate and his wife were happy to give more to the Treasury.

“John Kerry has often said that people like Teresa and himself got a huge tax break that America cannot afford,” said Jason Furman, a Kerry spokesman. “His plan would roll back the recent Bush tax cuts for families like his own and invest in healthcare, education and middle-class tax cuts.”

Others suggested that that attitude would be rare for the rich, even among Kerry supporters.

“People who are wealthy make an effort to keep their tax rate low, regardless of their politics,” said William Beach, director of the Center for Data Analysis at the Heritage Foundation, a conservative think tank in Washington. “When tax rates rise, upper-income individuals are able to hire accountants and attorneys to help them find ways to shelter their income. The rest of us can’t afford that.”

The other candidates in the Nov. 2 election, well-heeled Americans all, also would be able to avail themselves of tax-saving strategies.

The president and the first lady reported $822,126 in income last year, paying $227,490 in taxes. If Kerry’s tax plan were in effect, their liability would have been about $25,000 higher, according to CCH.

Cutting that tax bill would be easy, however. The Bushes earned almost half of their income from interest paid on Treasury bonds. If they had put that money in tax-free municipal bonds instead, they’d cut their taxable income to just over $400,000.

The result: a tax bill of $123,374, or nearly half of what they paid, even with the higher Kerry tax rate. (Of course, converting the Treasuries into munis could generate capital gains income if the bonds have appreciated in value. If Bush loses the election, he’d be smart to sell the Treasuries while still in office and trade them for munis before tax rates rise, McCrimlisk said.)

Bush running mate Vice President Dick Cheney and his opponent, Sen. John Edwards (D-N.C.), also have various tax-savings options at the ready.

Cheney and his wife, Lynne, earned nearly $1.3 million in 2003, paying $253,067 in federal income taxes. Under the Kerry plan, their tax liability would rise to about $280,000, according to CCH.

Like the Kerrys and Bushes, the Cheneys could reduce their tax liability by shifting investments into tax-free municipal bonds and stocks that don’t pay dividends. The Cheneys reported $137,644 in dividend income in 2003.

Lynne Cheney reported $50,000 in consulting income last year, mostly from her role as a director of Reader’s Digest. Although she resigned that position, as a self-employed consultant she has the ability to write off as much as $100,000 annually in business equipment purchases, as long as it doesn’t exceed her business income.

The vice president is already taking advantage of one popular tax-avoidance measure: deferred compensation. The plan, common among top corporate executives, allowed Cheney to spread over five years some of the wages he earned when running Houston-based Halliburton Co. From a tax standpoint, it’s better to see this money come in after retirement, when earnings are down and overall tax liability is lower.

John and Elizabeth Edwards reported $305,836 in income in 2003 and would pay about $5,000 more under the Kerry plan, according to CCH. One of the ways they could cut their taxes, however, would be to shift out of dividend-paying stocks, which accounted for $118,000 of their earnings in 2003.

Like Dick Cheney, John Edwards knows a little about saving on taxes.

Edwards set up his law practice under Subchapter S of the Internal Revenue Code, which allowed him to pay Medicare taxes only on his personal income and not on the firm’s revenue overall.

Although Edwards’ action fell outside the scope of the Kerry income tax proposal, experts note that the move saved him about $600,000 in Medicare taxes on more than $21 million in income.