Wednesday, September 03, 2008

Comparing McCain's and Obama's Tax Plans

I was asked if I had articles comparing the candidates' economic plans (other than the links I've posted previously). I've been trying to sort through the details of the tax plans myself. Unfortunately (oddly) as I write this, the websites of the two non-partisan analyses most widely cited are down.

It's one of those things where two smart people can see things totally different. For example, one person might say Obama's plan simplifies the tax code (1), others say it greatly complicates it (4). Obama's tax code changes are bracket-specific, and there are some phase-outs that depend on how much income you make (5).

Here's a summation of points mostly related to income taxes. Sources are numbered and linked at the bottom. I've colored elements I think sum it up. I've left some things out, you can follow the links to get the details:

I. Obama would raise income taxes on the top two tax brackets to pre-Bush levels of 36.9 and 39% respectively (1). (The top rate is currently 34% for people who earn more than $250,000).
Obama would also impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises by 12 to 14 percentage points, from 37.9 percent to roughly 48 to 50 percent (2).

Obama would also raise capital gains taxes on people earning >$250,000 to 20%, which is more than today but less than it was before 2003 (1,3).

McCain would keep the top tax rates, dividends, and capital gains taxes where they're at (6).

II. Obama would raise corporate income taxes, but cut them for business that "invest in creating jobs in America" and eliminate capital gains tax for small businesses and start-ups (7).

McCain would lower corporate income taxes (6).

Note: Corporate tax rate is currently 35%, higher than most OECD countries. But there are a lot of loopholes in the tax code that keep corporations from actually paying the 35%. Obama says we need to close the loopholes (no source for this, i heard him say it on TV).

III. McCain would double the personal exemption for families with children from $3,500 to $7,000 (6).

Obama would give a $500 payroll tax cut to workers. He also would double the Hope credit for college to $4,000 from $2,000 and make it fully refundable (7, 8).

IV. McCain would eliminate the tax exemption on employer-provided health care (raising taxable income) but would provide a tax credit of $2,500 (singles) or $5,000 (couples) to more than offset the proposed tax increase. Any of the credit not spent on insurance could be put into a health savings account.

Obama would give tax credits to businesses that provide health care to employees (1). Other aspects of his health care plan would supposedly reduce health care costs by $2,500 per family (9).

V. McCain wants to abolish the estate tax for everyone(this is a Republican plank).

Obama would eliminate the estate tax for 99.7 % of estates. He would increase the top estate tax rate ($3.5 million per person, $7 million for couples) to 45% (2,9).

VI. Obama's plan would add $3.4 trillion to the government debt over the next ten years (2) according to the Tax Policy Center (website down).

Senator McCain's plan would add roughly $5 trillion to the debt (2).

Note: Worth noting that both candidates say they will cut government programs. Obama says he'll go through the budget "line by line" (8), McCain says he will veto earmarks and cut Congressional spending (multiple sources). Obama pays for most of his programs through the tax hikes on incomes over $250,000. McCain doesn't pay for most of his other than saying he'll reign in government spending.

(There are plenty other differences in the area of tariffs, gasoline taxes, subsidies for alternative energy etc. You can research those yourself or follow the Labels on the right for various posts on the subjects).

1- "The Obama Tax Plan" by Obama advisors Austan Goolsbee and Jason Furman in the WSJ.
2- "Questions About the Obama Tax Plan" by Robert Carrol at The Tax Foundation blog.
3- "We Can't Tax Our Way Out of the Entitlement Crisis" by former Bush adviser R. Glenn Hubbard in the WSJ.
4- Allen Viard as quoted by Greg Mankiw on his blog.
5- "The Folly of Obama's Tax Plan" by Alex Brill and Allen Viard for The American.
6- "John McCain has a Tax Plan to Create Jobs" by Martin Feldstein and John B. Taylor in the WSJ.
8- "How Obama Reconciles Dueling Views on the Economy" by David Leonhardt for the NY Times.


Anonymous said...

Obama wants to tax me, but won't help me pay for my education. I am a lawyer making $160,000 plus bonus (we'll see in this economy). According to Terry McAuliffe Obama's plan would increase taxes on inviduals making $200k + and married couples making $250k plus. That means that by next year, when I get a small raise, I will be in Obama's new rich tax bracket, and if I was to get married, I'd probably be there today (even if I married someone who Obama considers to be securely in the middle class).

Obama went to Harvard Law. Granted it was awhile ago, but he should know how much an education costs. I have $150k in student loan debt. Most of my payments are apportioned to interest on that debt, yet I am not entitled to deduct my interest payments (up to $3000) because I make more than $70-80k.

Somehow when discussing federal taxes, politicians seem to conveniently forget state, city and medicare and social security taxes get added in too. In the end, someone like me who is paying a few thousand dollars each month on rent and thousands on student loan repayments ends up owing more than 50% of his hard earned income to the government. Somehow I am still expected to have a savings and prepare myself for retirement in 40 years. This is the kind of policy that makes me want to take a job where I could leave work at 7 each night rather than staying until 10 or 12, and to find a job where weekend work is rare.

Thanks Obama, I am glad that in your America you feel it is important to punish people who work hard to struggle to ahead and make something of themselves.

JTapp said...

Thanks for the comment. Check out the above post on disincentives, you have given us a good example.

Anonymous said...

"Thanks Obama, I am glad that in your America you feel it is important to punish people who work hard to struggle to ahead and make something of themselves."

Its funny to think that making $250,000 a year or in the top 3% of Americans, people will still be "struggling" financially. Tells you a little bit about our nation.

Anonymous said...

I'm sorry but this first comment from the lawyer sounds rather silly. Does he expect anyone to sympathize with his situation?

It also sounds to me silly and unfair this focus on disincentives. It's as if the aforementioned lawyer would actually work less because of that. If you read any study on incentives you will find that people like him are virtually inelastic to income changes.

It sounds like people just came out from their intro micro class where they learned about incentives and now they are trying to apply their recently acquired knowledge.

What is unambiguous about Obama tax and health plan is that it will actually improve welfare for the great majority of Americans.
The counterargument is that it may compromise growth because of desincentives, blablabla. The problem is that the basis of this counterargument depends on these poor people earning their 250K drastically changing their decisions because they are not getting the free ride that Bush had given them anymore. Is there any evidence that the Tax cuts that Bush gave improve anything?

JTapp said...

Actually, yes here is some recent evidence.

Anonymous said...

Ok, any reference in a respectable journal, such as the JPE, QJE, AER, etc.
Or at least something written by an economist with some reputation or who earned a position in a top University?

Because the "Tax foundation" and "National Tax Journal" does not sound like the best sources

JTapp said...

You can look at Mankiw's dynamic scoring model posts on his own blog.

Gale and Orzsag published a paper a few years back showing the positive effects they would have on GDP if the government had reduced spending.

I think economists are generally in consensus on this point: if the government had reduced spending then the data say there would have been great long-term benefits of the tax cuts. As it is, those benefits are now lost. The effects were also lessened because people knew the tax cuts wouldn't be permanent.

Anonymous said...

You mean their number of 0.7% extra GDP growth if there was budget balancing?
I quote "the economist" on that:

" There is no evidence that Bill Clinton’s 1993 tax increases stopped the wealthy from working harder. Mr Bush’s own Treasury estimated that all his tax cuts would boost GDP a tiny 0.7% after many years, and then only if they were paid for by spending cuts, which they weren’t.

And even if the economy grows the mentioned extra 0.7% it is by no means clear that this is welfare enhancing since it has strong distributional consequences such as increased inequality.
But, of course, for some people that doesn't matter...

kcsea said...

lets look at the data as regards the attorney's comments about his income, his taxes, and his student loan debt. Let's say his gross is $200K and his effective tax rate is 50%, which is what he said was with state/local taxes added in. Now he has 100K net income, or about$8,500 a month. On a $150K loan with interest of 6%, he has to pay $9,000 a year in interest, just to run in place. He said he was paying about $3,000 a month on his loan. That leaves him $5,500 a month. Depending on what part of the country he lives in, rent/mortgage could easily be $2,500 a month for a VERY modest living space. Now he has $3,000 a month left. After a small car payment, small retirement payment and modes life/auto insurance payment, he has less than $2,000 left for personal expenses and savings --that isn't much at all. For all this huge income, he is correct that he really doesn't have any room to spare, certainly not for savings. However, the silver lining is that if he really is paying $3,000 a month for student loans, his loans should be paid off completely within 5 years. That raises his disposable income by nearly 45%. If he is 25 when he finishes law school, he is done paying it off at 30 or so, he should be able to save enough money for a substantial downpayment on a nice home easily within 5 more years, a downpayment large enough so that he can continue to sock away money from the age of 35 into a nice retirement account, children's college fund, and so forth. so what's wrong with this picture? What's wrong is that this man is in the top 5% of the nation's earners, yet his personal income and personal income expenses sound like pretty typical middle class expectations. the problem is most people don't earn anywhere near that much. My husband and I have total student loan debt of about $35,000 and joint income this year of about 100K, which is up significantly from previous years. After federal taxes, our take home pay is about $74,000. We pay WA sales tax rather than state income tax. After paying $1,000month for preschools for our 2 young children, a modest mortgage($1,500), 2 car payments/insurance ($850), and utilities, we have about $1,650 a month for groceries, clothes, school fees, and all other expenses and for savings for health care deductibles, vacations, car/home maintenance, etc. It sure goes fast, even with careful grocery shopping and a pretty simple lifestyle. Wages and good health care benefits are not good in the real terms of what things cost in America these days. Something is out of whack. I feel very badly for families earning even less than ours who want to own their own home, or stay home with the kids. But rather than getting a $1,000 check from the federal government to ease the pain, wouldn't it be better to get our businesses working betting and paying better and raise real wages in our country? People needs thousands of dollars of improvements, not a paltry handout. Our mid-size businesses in Washington Statem, depending on the business, may pay real taxes of nearly 60% of their income to state/federal government under Obama's plan. How does this help wage earners?

Anonymous said...

Again... it still sounds rather silly...
This person you are describing is still living on a $2500 nice apartment (even in NYC) and has $2000 to do whatever they want.

There are tons of people who earn much less than that who are being evicted from their apartments, can barely afford food, who cannot afford health insurance.

It sounds absurd to bring the grief of the first group up when we live in a country with so many people in the second.