An Updated Analysis of the 2008 Presidential Candidates’ Tax Plans

[w¡n9Nµ7 §£@¥€r 123]

Highlights for those of who you don't want to read the whole thing:

1. "Senator McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts ... Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers"

2. "Senator Obama’s [health] plan would reduce the number of uninsured Americans by about 18 million in 2009, and 34 million in 2018 ... Senator McCain’s plan would have far more modest effects, reducing the number of uninsured by just over 1 million in 2009, rising to a maximum of almost 5 million in 2013, after which the number of uninsured would creep upward"

3. "Senator Obama’s plan ... would increase the debt by about $3.4 trillion by 2018; Senator McCain’s plan would increase it by $5.0 trillion"

Both candidates have proposed major changes to the nation’s tax laws. Senator McCain would permanently extend the 2001 and 2003 tax cuts, increase deductions for taxpayers supporting dependents, reduce the corporate income tax rate, and allow immediate deductions for investments in certain capital equipment. Senator Obama would permanently extend certain provisions of the 2001 and 2003 tax cuts primarily affecting taxpayers with incomes under $250,000 but repeal the cuts in the top two marginal income tax rates ahead of their scheduled expiration in 2010; increase the maximum rate on capital gains; raise the top tax rate on qualified dividends from its current level (but keep it below pre-2001 levels); and enact new and expanded targeted tax breaks for workers, retirees, homeowners, savers, students, and new farmers. Senator McCain proposes to extend permanently and increase the AMT "patch" that has prevented most individuals and families with incomes below $200,000 from being affected by the tax and lowered the tax for others, and in our interpretation of his proposal, Senator Obama would also extend the patch. Each candidate would also increase the estate tax exemption and reduce the estate tax rate compared with current law in 2011 and beyond, although Senator McCain would cut the tax much more than Senator Obama. Finally, each candidate promises to broaden the tax base and reduce corporate loopholes. McCain lists eight breaks for oil companies as targets but, other than that, is short on details for his pledge to eliminate "corporate welfare." Obama identifies a variety of steps, including basis reporting for capital gains, taxing carried interest as ordinary income, and enacting sanctions on international tax havens that don’t cooperate with enforcement efforts, but he would also need additional as-yet-unspecified policies to achieve his revenue target for base broadening.

Although both candidates have at times stressed fiscal responsibility, their specific non-health tax proposals would reduce tax revenues by an estimated $4.2 trillion (McCain) and $2.8 trillion (Obama) over the next 10 years. Both candidates argue that their proposals should be scored against a "current policy" baseline instead of current law. Such a baseline assumes that the 2001 and 2003 tax cuts would be extended and the AMT patch made permanent. Against current policy, Senator Obama’s proposals would raise $800 billion and Senator McCain’s proposals lose $600 billion.

The two candidates’ tax plans would have sharply different distributional effects. Senator McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households. Many fewer households at the bottom of the income distribution would get tax cuts and those tax cuts would be small as a share of after-tax income. In marked contrast, Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers. The largest tax cuts, as a share of income, would go to those at the bottom of the income distribution, while taxpayers with the highest income would see their taxes rise significantly.

The impact of the tax code on economic activity under each candidate’s policies would differ in several important ways. Under Senator McCain’s proposed policies, the top marginal rates (35 percent on individual income and 25 percent on corporate income) would be significantly lower than under Senator Obama’s plan (39.6 and 35 percent, respectively). McCain’s reduced individual and corporate rates could improve economic efficiency and increase domestic investment, but the larger future deficits would reduce and might completely negate any positive effect. In contrast, Senator Obama’s proposed new tax credits could encourage desirable behavior, particularly if the childless EITC and payroll tax rebate encourage additional labor supply among childless low-income individuals. However, he would also direct new subsidies at an already favored group—seniors —and an already favored activity—homeownership—which could probably be better directed elsewhere.

...

We also present a very preliminary analysis of the health plans of each campaign. Senator McCain proposes to replace the current income tax exclusion of employer-paid health insurance premiums with a refundable income tax credit of $2,500 for individual coverage or $5,000 for family coverage, whether acquired at work or purchased in the individual nongroup market. (The current exclusion of employer-paid premiums from payroll taxes would continue.) He would also establish a special high-risk pool to enable individuals with chronic health conditions to purchase health insurance. Senator Obama would provide subsidies that decrease with income for low- and middle-income families to help them purchase insurance in a new nongroup purchasing pool, mandate health insurance coverage for children, penalize employers who fail to provide health insurance to their employees, expand public health insurance programs for poor children and families, and provide subsidies for small employers that offer health insurance.

As noted below, important details of both plans are not known, so we made assumptions that might or might not be consistent with the final plans proposed by each campaign. Under our assumptions, if the plans took effect in 2009, the McCain plan would cost about $1.3 trillion over ten years and the Obama plan would cost about $1.6 trillion. Both campaigns propose measures that they believe will reduce the rate of growth of health insurance premiums, which would reduce the cost of their new subsidies and existing public programs. We did not evaluate the effectiveness of those measures and did not include savings from health care cost efficiencies in our estimates. Under our assumptions, Senator Obama’s plan would reduce the number of uninsured Americans by about 18 million in 2009, and 34 million in 2018. Almost all children would have coverage because the law would require it, but nearly 33 million adults would still lack coverage in 2018. Senator McCain’s plan would have far more modest effects, reducing the number of uninsured by just over 1 million in 2009, rising to a maximum of almost 5 million in 2013, after which the number of uninsured would creep upward because the tax credits grow more slowly than premiums. Both plans are highly progressive, although Senator Obama’s plan targets subsidies more toward low- and middle-income households and is thus significantly more progressive than Senator McCain’s proposal.

Both campaigns have complained that our analysis is incomplete because we fail to consider the effects of their spending cuts on the budget. If federal spending evolves as CBO predicts, the tax cuts would translate into substantial increases in the national debt. Senator Obama’s plan as described by his economic advisers would increase the debt by about $3.4 trillion by 2018; Senator McCain’s plan would increase it by $5.0 trillion. And the health proposals and campaign promises not in the official descriptions could increase the costs still further.

http://www.taxpolicycenter.org/UploadedPDF..._candidates.pdf