How will Obama's tax plans work in this economy?

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On the campaign trail, Barack Obama proposed more than a dozen tax changes that would affect individuals. The net effect would be to raise taxes on higher-income people and reduce them for low- and middle-income ones.Most of the ideas were floated before credit markets froze and the economy faltered. By the time the Obamas and their new puppy settle into the White House, things could be even worse.Pundits say this could force Obama to shelve his tax plans while he focuses on the economy."Most of his tax proposals will be deferred because they don't have a stimulus effect and some of them will make the economy worse," says Roberton Williams, principal research associate with the nonpartisan Tax Policy Center in Washington DC.The centerpiece of Obama's tax plan is the Making Work Pay Credit. It would give workers making up to $75,000 per year a credit equal to 6.2 percent of their first $8,100 in annual earnings. The credit, worth about $500 per year, would essentially refund what eligible workers paid in Social Security tax. Couples earning up to $150,000 a year could get up to $1,000 if both work.The credit would not stimulate the economy because it "rewards people for what they have already done. Those people are already working," Williams says.Like other proposed tax cuts, the credit would provide no immediate stimulus because people would not get the benefit until they file their 2009 taxes in 2010, unless it was sent out in an advance refund check -- a tactic used in the Bush administration.For high-income people, Obama planned to restore the top two rates in effect during the Clinton era -- 36 and 39.6 percent. Today the top rate is 35 percent.This increase would affect people whose taxable income exceeds about $165,000 (single) or $200,000 (married filing jointly). (Taxable income is the amount you pay taxes on; it is less than gross income.) Obama would also increase the capital gains and dividend tax for this same group of people to 20 percent from 15 percent.Clint Stretch, managing principal for tax policy with Deloitte & Touche, estimates that a family of four with $500,000 in income from wages, interest and capital gains would pay an extra $3,100 in taxes under the Obama plan. But Stretch predicts that Obama "will not be anxious to raise rates until the economy firms up. Is this the first fight he wants to have, or are there things the new administration wants to do that would have a higher possibility of bipartisan support?" Should you sell any capital gains you happen to have left while rates are lower? My simplistic answer: How much would you pay in transaction costs? Bob Doll, Blackrock's global chief investment officer for equities, also doubts that Obama will try to raise taxes as long as the economy is contracting. "If you are going to raise taxes, you don't do it in the middle of a recession," he says. "We would be surprised to see significant tax increases enacted in 2009."Obama's more recent tax proposals intended to help suffering from the downturn, but they, too, would be a hard sell.For example, he proposed letting people withdraw 15 percent of their Individual Retirement Plan or 401(k) balances (up to $10,000) without paying the 10 percent penalty that applies to withdrawals before age 59 1/2. It would apply this year and next.Retirement-security advocates hate this warm-hearted idea."Any proposal that tries to solve the larger economic crisis by telling people or making it easier to use their 401(k) money is not the right solution," says Karen Friedman, policy director of the Pension Rights Center.During Obama's term, higher income people are likely to pay higher taxes. Does that mean you should realize capital gains -- if you have any left -- or accelerate income into 2008 to take advantage of today's lower rates?Before selling an asset to get this year's capital gains rate, Stretch says investors should weigh their transaction costs against how much they would save in taxes and also consider the "opportunity cost," or what else they could do with money they would send to the government. E-mail Kathleen Pender at kpender(at)sfchronicle.com.(Distributed by Scripps Howard News Service, www.scrippsnews.com.)