McCain and Obama's tax plans...reading the small print

The top one percent are now estimated to own between forty and fifty percent of the nation's wealth, more than the combined wealth of the bottom 95%.
--From Lcurve.org

Editor's note: This shouldn't be necessary, but, tragically, I have friends who are actually considering voting for McCain based on his so called 'tax plan'. These friends seem reasonably intelligent in most other respects, so I'm writing this to cure their acute Bogartian illness, or at least, in some small way, help to alleviate their most glaring symptom: they are deeply misinformed.

What's John McCain's plan? Is he really dramatically cutting taxes even more deeply than Bush? Effectively, doubling down on Bush's tax cut?

Um, yep. But it might not help my friends -- who, like 96% of America, make less than $250,000 per year ...

From the Wall Street Journal

Sen. McCain's tax plan largely leaves the middle class behind. His one and only middle-class tax cut -- a slow phase-in of a bigger dependent exemption -- would provide no benefit whatsoever to 101 million families who do not have children or other dependents, or who have a low income.

But Sen. McCain's plan does include one new proposal that would result in higher taxes on the middle class. As even Sen. McCain's advisers have acknowledged, his health-care plan would impose a $3.6 trillion tax increase over 10 years on workers. Sen. McCain's plan will count the health care you get from your employer as if it were taxable cash income. Even after accounting for Sen. McCain's proposed health-care tax credits, this plan would eventually leave tens of millions of middle-class families paying higher taxes. In addition, as the Congressional Budget Office has shown, this kind of plan would push people into higher tax brackets and increase the taxes people pay as their compensation rises, raising marginal tax rates by even more than if we let the entire Bush tax-cut plan expire tomorrow.

The McCain plan represents Bush economics on steroids. It has $3.4 trillion more in tax cuts than President Bush is proposing, largely directed at corporations and the most affluent. Sen. McCain would implement these cuts without proposing any meaningful steps to simplify taxes or eliminate distortions and loopholes. In addition, Sen. McCain has floated over $1 trillion in new spending increases but barely any specific spending cuts.

To make this a bit more personal, under McCain's plan, he and Cindy McCain who are valued at approximately $100 million dollars will save close to $400,000 a year in taxes. The average middle class American (making less than $250,000)will save about ... $0 ... and they may actually end up paying more if his health proposal is implemented.

Sound fair to you?

Not only is it not fair, it will prove even more disastrous for the infrastructure of our country than Bush's plan.

From Salon.com

A 2004 study by the Congressional Budget Office found a full third of Bush's controversial 2001 and 2003 tax cuts went to the top 1 percent of earners. McCain's tax cuts would be more massive than Bush's, and appear to skew even more to the wealthy. President Bush touted his breaks as providing a boost for the economy, but tax-policy experts credit Bush's tax policy with shifting the tax burden to the middle class, ballooning budget deficits, and contributing to a widening disparity in personal wealth.
[snip]
To get a sense of McCain's ambition, his tax cuts would cost the federal budget as much as $4 trillion from 2009 through the end of 2018, according to the nonpartisan Tax Policy Center. That's eight times the size of the Pentagon's base budget this year. Bush's cuts would cost only $1.6 trillion if extended to cover the same ten-year period.

So what is Obama's tax plan? Is he really going to raise taxes astronomically as the McCain campaign hyperbolically suggests--"the Largest Tax Increase Since World War II"?

Um, no.

From the Wall Street Journal:

Sen. Obama believes that responsible candidates must put forward specific ideas of how they would pay for their proposals. That is why he would repeal a portion of the tax cuts passed in the last eight years for families making over $250,000. But to be clear: He would leave their tax rates at or below where they were in the 1990s.

- The top two income-tax brackets would return to their 1990s levels of 36% and 39.6% (including the exemption and deduction phase-outs). All other brackets would remain as they are today.

- The top capital-gains rate for families making more than $250,000 would return to 20% -- the lowest rate that existed in the 1990s and the rate President Bush proposed in his 2001 tax cut. A 20% rate is almost a third lower than the rate President Reagan set in 1986.

- The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate. This rate would be 39% lower than the rate President Bush proposed in his 2001 tax cut and would be lower than all but five of the last 92 years we have been taxing dividends.

- The estate tax would be effectively repealed for 99.7% of estates, and retained at a 45% rate for estates valued at over $7 million per couple. This would cut the number of estates covered by the tax by 84% relative to 2000.

Overall, in an Obama administration, the top 1% of households -- people with an average income of $1.6 million per year -- would see their average federal income and payroll tax rate increase from 21% today to 24%, less than the 25% these households would have paid under the tax laws of the late 1990s.

Sen. Obama believes that one of the principal problems facing the economy today is the lack of discretionary income for middle-class wage earners. That's why his plan would not raise any taxes on couples making less than $250,000 a year, nor on any single person with income under $200,000 -- not income taxes, capital gains taxes, dividend or payroll taxes.

From Obama's website:

In an interview with CNBC, Barack Obama stated, “And I think that we have an economy that's been out of balance for too long, so the general principle of raising taxes on higher income Americans like myself, and providing relief to those who haven't benefited as much from this new global economy, I think is a sound one. And keep in mind on all of these proposals, what I've said is, let's make sure that we define the well-off so that we're not hitting the middle class, you know. I generally define well-off as people who are making 250,000 dollars a year or more [note to John McCain--$250,000 is a lot less money than 5 million dollars, maybe with all that dough from Cindy you could buy yourself a calculator?] And that means, for example, if we raise the capital gains tax, I will exempt people who are essentially small investors, and really capture those who have done very, very well over the last two decades.” [CNBC, 06/09/08]

Less than 2 Percent of Small Businesses Would be Affected by Rolling Back the Bush Tax Cuts on the Wealthy: According to the nonpartisan Tax Policy Center, less than 2 percent of individual tax filers who report small business income fall into the top two marginal tax rates.

Below is a graphic that gives a pretty good pictoral representation of the differing tax plans:



From the nonpartisan Tax Policy Center

Editor's note: The Tax Policy Center is a joint venture of the center-left Brookings Institution and Urban Institute that is nonetheless staffed by both Republicans and Democrats -- co-director Eugene Steuerle was a deputy assistant secretary under Ronald Reagan -- and is known for its methodological rigor. Its 38-page analysis found that McCain's proposals would make the tax system even "more regressive" than permanently extending the Bush tax cuts of 2001 to 2006. McCain would accomplish this by following Bush's blueprint and then supersizing it: providing "relatively little" tax relief to low- and middle-income earners, while giving "huge tax cuts" to the highest income brackets.

Both candidates argue that their proposals should be scored against a “current policy” baseline instead of current law. Such a baseline assumes that the 2001 and 2003 tax cuts would be extended and the AMT patch made permanent. Against current policy, Senator Obama’s proposals would raise $800 billion and Senator McCain’s proposals lose $600 billion.

The two candidates’ tax plans would have sharply different distributional effects. Senator McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households. Many fewer households at the bottom of the income distribution would get tax cuts and those tax cuts would be small as a share of after-tax income. In marked contrast, Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers. The largest tax cuts, as a share of income, would go to those at the bottom of the income distribution, while taxpayers with the highest income would see their taxes rise significantly.