EDITORIAL: Tax time for America

By | Monday, August 4, 2008

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With all the talk of the wars, gas prices, job losses and home foreclosures, and tax breaks, neither candidate is really talking about how their tax proposals are going to pay to fix these problems. John McCain asserts that Barack Obama is going to raise taxes on energy, businesses, investors and the rich. High income taxes are bad for everyone, particularly working-class consumers whose combined wealth and spending drives our economy. Both Mr. McCain and Mr. Obama say they are not going to raise "middle-class" taxes or in this case allow to expire the tax cuts already in place under President Bush. That's great news for the 220 million average joes in America who could be described as middle class, but it doesn't address how tax policies will affect the American way of life.

Mr. Obama will raise taxes for sure, in various ways, on the five percent of Americans making more than $250,000 annually. He will increase the capital-gains tax rate from the current 15 percent to about 25 percent. He will increase the top rate from the 35 percent now up to Clinton-era rates of 39 percent, and would impose an additional tax on such wage earners for Social Security when their wages exceed $250,000. He also wants to tax hedge-fund managers' earnings as income, even though they are derived from dividends and stock-price gains rather than a set salary. Everyone else will get variable breaks: Taxpayers who do not itemize and make less than $150,000 will get a $500 credit. Parents, including those with children in college, will get $4,000 cut from their tax bill. And seniors making less than $50,000 will pay no taxes at all.

Mr. McCain's plan is actually much more simple and more pro-business and investment. Everything would stay the same as it is right now under the Bush tax cuts - no marriage-tax penalty, keep the $1,000-child-tax credit, and the other tax breaks in place - making them permanent, but increase the dependent exemption from $3,500 to $7,000. And he would cut corporate tax rates from 35 percent to 25 percent. But there is a slight uncertainty to Mr. McCain's approach on Social Security and how he would alter taxes or the entitlement itself to keep the fund solvent. He supported President Bush's proposal to create private savings accounts within the system, but recently said his approach would be to have all options on the table, including payroll-tax increases. That is a serious conundrum for Mr. McCain to work through, considering his pledges not to raise taxes.

The problem with both proposals: neither of them is certain to succeed in balancing the budget or lowering the debt - if they even get through Congress at all.The wars in Iraq and Afghanistan are costing about $300 billion annually - a huge chunk of the budget deficit that has been consistently in the $380 billion to $480 billion range since they began in 2002. The United States owes $9.5 trillion to various countries, banks and investors. Energy prices are causing increases in the cost of almost everything - potentially leading down the road to massive inflation.

Bill Clinton's tax-to-the-hilt policies in his first term hurt investment and the housing market, and whatever good there was during his tenure burst along with the technology market bubble. The first President Bush once wagged his fingers in our faces promising, "no new taxes," but then changed his mind - and paid a heavy political price in 1992.

And that is the reality of tax policy. Just as troop withdrawals are determined by conditions on the ground, taxes are dependent upon conditions in the marketplace as well as federal spending. Candidates need to be discussing how their economic proposals will help fix America's fiscal problems for America, not just how they might impact individual Americans.

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