McCain And Obama Take Different Roads On Tax

by Leroy Baker, Tax-News.com, New York

21 August 2008

A recent examination of the tax proposals of the presumptive presidential candidates Senators Barack Obama and John McCain by the Tax Foundation finds the nominees taking starkly different approaches to taxation to achieve their economic goals.

With rising fuel prices, the housing market crisis and health care funding still critical issues, the economy has figured prominently in each candidate's campaign in the new presidential economic cycle. However, Robert Carroll, Vice President for Economic Policy at the Tax Foundation, the non-partisan taxation think tank, observes that the candidates have significantly different tax policies that address these issues.

"Senator Obama has included a set of carefully targeted tax proposals that narrowly aim benefits to specific types of taxpayers, while Senator McCain provides broad tax relief with benefits that are indirect," noted Carroll. "In both cases, tax relief is provided to the vast majority of the electorate."

Carroll's examination of the competing tax plans, which references the cost of each as estimated by the Urban-Brookings Tax Policy Center, shows that McCain only has two proposals that directly affect individuals: the expansion of the dependent exemption and a new health care tax credit. On the other hand, Obama provides seven proposals for individuals that target housing, education, child care, and low-income work.

There are also wide differences in their proposals on business taxation. While Obama proposes a small business health tax credit as well as permanent extension and expansion of the research and experimentation credit, McCain's proposals are much more expansive, including a reduction in the corporate tax rate from 35% to 25% and a write-off of business investment in equipment. Furthermore, McCain's lower corporate tax rate recognizes that the United States' business tax system, with the second-highest corporate tax rate among industrialized nations, may be becoming uncompetitive in a global marketplace.

Carroll explains that, in simple terms, Obama focuses on redistribution and McCain focuses on improving economic incentives.

"Senator Obama provides tax relief directly to individuals, without making major changes in how the tax system interacts with or affects individual and business decision making," explained Carroll. "Senator McCain provides broad tax relief and channels most of it to businesses, with the notion that the best way to help workers is to encourage investment and ensure that the US remains competitive in the global marketplace."

Meanwhile, the opinion pages of the Wall Street Journal continue to provide a battle ground in the war of words between the the two camps. Writing in the WSJ on Tuesday, Peter Ferrara, director of entitlement and budget policy for the Institute for Policy Innovation who served as an advisor under Presidents Ronald Reagan and George W. Bush, warned that Obama promises to raise marginal rates for just about every federal tax, and he dubbed his plan "The New Tax Welfare."

"The details released by his campaign last week confirm what a President Obama has in mind for our most productive citizens," he wrote. "The top individual income tax rate, for example, would be increased by 13%, to 39.6%; the next-highest rate would be raised to 36%. The top rates on capital gains and dividends would rise by a third, to 20%."

Ferrara also said that Obama would raise social security taxes by 16% to 31% for families making over USD250,000 a year, make permanent the estate tax with a top rate of 45% and impose new taxes on business, such as a new payroll tax to fund his health insurance plan.

"He also contemplates several increases in the corporate income tax, including a new so-called windfall profits tax on oil companies," Ferrara observed.

In their own WSJ op-ed last week, Obama's economic team sought to correct "distortions and misinformation" about the Democratic presidential nominee's tax proposals, while at the same time discrediting the tax plans of Republican opponent John McCain.

Jason Furman and Austan Goolsbee, Economic Policy Advisor and Senior Economic Advisor respectively in Obama's campaign team, dismissed suggestions that taxes will go up across the board under an Obama presidency, claiming that only the top 1% of US households, or those with an average annual income of USD1.6mn, will see higher taxes.

McCain, on the other hand, would take money from the middle class and from future generations "so that the wealthy can live better today," they contend.

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