- The Washington Times - Monday, July 14, 2008

The differences between the tax policies being promoted by Sens. Barack Obama and John McCain are stark, but neither candidate’s proposal tackles the nation’s worsening fiscal problems, analysts say.

If Congress fully adopts the next president’s tax policies unrelated to health care, average federal taxes in 2009 for the middle fifth of the American population would decline by $1,042 under an Obama administration and by $319 under a McCain administration, according to an analysis of their plans by the nonpartisan Tax Policy Center (TPC), a joint venture of the Urban Institute and the Brookings Institution.

Meanwhile, with congressional approval, average federal taxes for the top one-tenth of 1 percent of the population, which includes households that earn at least $2.9 million, would rise by more than $700,000 next year if Mr. Obama becomes president and would fall by nearly $270,000 if Mr. McCain wins the election.

These figures do not include Mr. McCain’s proposal to allow taxpayers to calculate their taxes under an optional alternative tax system, which would feature two rates, an increased personal exemption and a large standard deduction.

Former Sen. Phil Gramm of Texas, an economic adviser to Mr. McCain, told The Washington Times on Wednesday that the two tax rates would be 10 percent and 25 percent, which is 10 percentage points below today’s top rate.

A TPC analysis of a Republican Study Committee proposal to establish an alternative tax system with a top rate of 25 percent concluded that it “would disproportionately benefit those with very high incomes, making the tax system less progressive.”

These figures also do not include Mr. Obama’s recent proposal to apply Social Security payroll taxes to salaries above $250,000. Social Security taxes are now limited to the first $102,000 of wage and salary income.

Leonard Burman of the TPC has estimated that applying the full Social Security tax to salaries above $250,000 could increase Mr. Obama’s annual tax increase for the top one-tenth of 1 percent of income earners by an additional $400,000. The Obama campaign has not decided what Social Security rate will apply to incomes above $250,000.

Mr. Burman estimated that the top marginal tax rate, including state and local taxes, could reach 57 percent under Mr. Obama.

“A lot of high-income people can re-characterize their income to avoid paying the higher individual income-tax rates,” he said. “I’m concerned about the effect of high marginal individual and corporate income-tax rates on economic incentives and tax sheltering.”

Moreover, as long as Social Security tax revenues continue to exceed benefit payments, “the additional revenues collected by raising the Social Security income threshold would be spent on other government programs, while masking the deficit’s size,” Mr. Burman said.

The Obama tax plan in 2009 would redistribute $131 billion from the top 1 percent to all other taxpayers, said Scott Hodge of the Tax Foundation.

Mr. Hodge, citing Congressional Budget Office data, said that the top 1 percent of households paid nearly 40 percent of federal income taxes in 2005. The top 20 percent paid 86.3 percent.

“It is startling to learn how greatly the Obama plan would shift the tax burden further up the income pole,” Mr. Hodge said. “It’s the most ambitious redistribution of wealth in recent memory.”

“Income redistribution through the tax code entails less economic cost than other means of redistributing income, including limiting trade and increasing regulation,” Mr. Burman said. “Almost all the gains of the last 20 years have gone to the top 1 percent, putting enormous pressure on the political establishment to do something about it,” he said.

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