‘08 ISSUES
John McCain and Barack Obama have starkly different views on taxes, just ask Joe the Plumber.
The presidential candidates used Joe Wurzelbacher of Toledo, Ohio, as a prop in their final debate, sparring over how their tax plans seek to generate prosperity and benefit average, hardworking Americans.
Mr. McCain, Arizona Republican, says that stronger economic growth flows from low tax rates that unleash private savings and investment capital to expand businesses or help people like Mr. Wurzelbacher to purchase one.
He says Mr. Obama’s plan to increase taxes on those earning more than $250,000 will hurt small-business owners and is an effort to redistribute wealth.
But Mr. Obama, Illinois Democrat, says that the engine of the economy is the nation’s vast working class and that transferring some of the nation’s wealth from upper-income Americans to lower-to-middle-income workers will help lead the country out of recession.
“McCain appears to be more concerned about how higher tax rates affect overall economic growth, but Obama says the distribution of the economic pie from all his refundable tax credits for those at the bottom outweigh any adverse economic effect of higher rates,” said economist Gerald Prante at the nonpartisan Tax Foundation.
Mr. Obama would raise taxes on the wealthiest 5 percent of income earners and redistribute much of that money to lower-income Americans through refundable tax credits or checks; keep the 35 percent tax rate on corporations; and raise taxes on investors, energy companies and businesses that move parts of their operations overseas.
“Obama’s focus is on giving working families a tax break, and rolling back the upper tax levels that [President] Bush gave to the very wealthy, the net effect of which is to make the tax system more progressive,” said Roger Hickey, co-director of Campaign for America’s Future, a liberal advocacy group.
“Obviously, giving a tax cut to lower- and middle-class workers will stimulate the economy,” he said. “But his economic program is not so much driven by tax cuts as it is by investment to get the economy going for everyone.”
Eight years after the Bush tax cuts, which were applied across the board, liberals are cheering the prospect of raising the top rates on the wealthiest taxpayers to help those in the lower-income brackets who they say have been hurt by the administration’s economic policies.
Conservatives disagree, and Mr. Wurzelbacher became their representative when on Sunday he questioned Mr. Obama at a campaign rally on whether his “new tax plan is going to tax me more” if he bought the business whose income was between $250,000 and $280,000, the senator replied it would because the high tax rate was a key part of his social agenda to “spread the wealth around.”
“There is a fundamental difference between McCain and Obama on taxes. Obama wants to, in his words, ‘share the wealth’ by redistributing income, while McCain wants to create new wealth by boosting incentives for job-creating investment,” said economic policy strategist Cesar Conda, who was Vice President Dick Cheney’s chief domestic adviser.
“Both McCain and Obama promise tax cuts. But many of Obama’s ‘cuts’ are actually increased federal spending on refundable credits. By contrast, McCain offers broad-based, pro-growth cuts that will benefit every American family,” said tax analyst Chris Edwards at the Cato Institute.
Obama’s plan
At the center of the freshman senator’s plan is a low- to middle-income refundable tax credit that would give $500 to individual workers or $1,000 for working couples. Mr. Obama has said repeatedly in his campaign speeches and in the presidential debates that it would “cut taxes for 95 percent of working Americans.”
To offset this and pay for much of his new domestic spending proposals, Mr. Obama would raise the two top marginal tax rates on people making $250,000 and up from 33 percent to 36 percent and from 35 percent to 39.6 percent. He would keep the Bush cuts in marginal tax rates for lower- to middle-income earners, but he would raise the capital-gains tax on the sale of stocks and other assets and the dividend tax from 15 percent to 20 percent.
Mr. Obama says his income-tax increases for wealthier workers, which would push marginal tax rates up to where they were under President Clinton, are needed to “restore fairness to the system.” The Illinois senator’s plan gets a strong vote of confidence from Bill Galston, who was Mr. Clinton’s chief domestic adviser.
“Obama’s tax proposals would help restore fiscal balance, give a desperately needed break to working-class and middle-class families, and would reinstate the principle that we should pay for what we consume,” Mr. Galston said.
“Supply-side theology to the contrary notwithstanding, there is no compelling empirical evidence that these proposals would impede economic growth. The economy did better with Bill Clinton’s tax system than with George W. Bush’s,” he said.
The rest of the Obama tax plan is made up of other tax credits, including a $4,000 tax credit for college tuition, a 10 percent mortgage interest tax credit, a 50 percent matching “savings” tax credit for middle-income families; expanding the Earned Income Tax Credit to give individual workers up to $555 a year and $1,110 if they are paying child support; and a child care credit of up to $6,000 a year.
All of them would be refundable, which means people could receive payments for these amounts if they pay no taxes.
Much of the income-tax credit would go to lower- and middle-income taxpayers in the form of “refundable” U.S. Treasury checks to the 47 million tax filers “with zero income tax liability in 2009 under current law.” Conservatives also point out that the refundable tax credit would begin phasing out for couples earning $150,000 and individuals who make $75,000.
Critics call his plan a thinly disguised form of income redistribution and question how he can call it a tax cut, rather than a form of welfare or government redistribution, if millions of beneficiaries of his refundable credits do not pay taxes. “There are several sleights of hand, but the most creative is to define the meaning of ‘tax cut,’ ” the Wall Street Journal said in an editorial.
Some liberal economic analysts acknowledge this abstract point but argue that Mr. Obama’s proposals to put more money into the pockets of lower- and middle-income taxpayers is exactly what the slumping economy needs right now.
“In the kind of situation we are facing now, which is a recession, what you want to do is get money into people’s hands to spend and they are likely to spend it,” said economist Charles L. Schultze, former chairman of the Council of Economic Advisers in the Carter White House.
“It’s really a transfer payment. A lot of it will go to lower and middle people and will particularly help people who are in difficult situations, they’ve been laid off, their home mortgages have been foreclosed. That will help boost purchasing power which is what business need right now,” Mr. Schultze said.
McCain’s plan
Mr. McCain’s tax cuts are heavily focused on business expansion and boosting venture capital investment in new entrepreneurial enterprises to spur new job creation.
“Entrepreneurs are at the heart of American innovation and growth. Entrepreneurs create the ultimate job security - a new, better opportunity if your current job goes away,” his tax plan says at the outset.
The core of his plan “to keep taxes low” is to make the Bush tax cuts permanent, including the top income-tax rate of 35 percent and the 15 percent rates on dividends and capital-gains taxes. Earlier this week, Mr. McCain proposed temporarily cutting the capital-gains rate to 7.5 percent for two years to boost capital investment and stock values to help the stock market recover.
He would phase out the Alternative Minimum Tax that has taken an increasingly larger bite out of middle-class incomes and would cut the corporate tax rate from 35 percent to 25 percent.
Mr. McCain has argued that raising taxes on any corporations, as Mr. Obama would do, would be a disastrous policy when the economy is falling into a recession. “A lower corporate tax rate is essential to keeping good jobs in the United States,” his tax plan says.
In some cases, though, both men have proposed similar tax-benefit changes. They would waive the rules requiring Americans at age 70 to begin withdrawing funds from their 401(k) plans no matter the market conditions; and both would suspend taxes on unemployment benefits during the economic crisis.
“He’s had some good ideas,” Mr. Obama said about his rival this week. “I think the idea of making sure that people aren’t forced to sell their 401(k) accounts at age 70 when the market is in the tank … makes sense.”
Nevertheless, they remain far apart on their chief approaches to tax policy, with Mr. Obama hostile to tax breaks for upper-income investors who save and invest the most, and seeking to transfer income wealth to those on the lower-to-middle end of the income scale.
When asked earlier this week about Mr. McCain’s proposal to temporarily slash the capital gains tax rate in half, Mr. Obama ridiculed, “the idea … to cut capital gains taxes when I don’t know anybody, even the smartest investors, who right now are going to be experiencing a lot of capital gains.”
But earlier this year, billionaire Warren Buffet, one of Mr. Obama’s economic advisers, bought $5 billion of preferred stock in General Electric, on the belief that when the economy and the stock markets recover, his investment will yield him a hefty gain.
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