Anyone who doubts that the American dollar just isn’t what it used to be need look no further than the nation’s record job losses, exorbitant food and gas prices, and unprecedented home foreclosure rates. These and other bread-and-butter issues will be at the forefront of voters’ minds when they head to the polls this fall, and the outcome of the presidential election will likely depend on which candidate they believe has the best plan to reverse these economic trends.
Sens. John McCain and Barack Obama, the presumptive nominees, have released tax plans that offer distinctly different approaches that each claim will help cure the nation’s economic woes.
According to a study by the nonpartisan Tax Policy Center, a joint effort of the Urban Institute and Brookings Institution, McCain supports tax cuts that would provide the greatest benefits to high-income taxpayers who would see their after-tax income rise by more than twice the average for all households. Obama’s plan, the study found, offers much larger tax breaks to low- and middle-income taxpayers and increases taxes for high-income earners.
“McCain’s proposals are clearly oriented toward making a tax system more favorable for high-income individuals and businesses that he sees as making investments to move the economy ahead. Obama’s proposals are more tailored to lower-income people to provide support and incentives and additional disposable income.†says Margaret Simms, an Urban Institute senior fellow and a member of the BLACK ENTERPRISE Board of Economists. “Broadly characterized, Obama’s plan would be more favorable to African Americans. While it’s true that African Americans are doing better than they have in the past, on average, they’re still disproportionately in those lower income categories.†According to Simms, the McCain proposal has features that might be more attractive to business owners related to equipment deduction and the capital gains tax.
McCain proposes to make permanent all of the provisions in President Bush’s tax cuts except for the estate tax repeal, which would have a $5 million exemption and 15% rate. The current tax law under Bush has a $3.5 million exemption (meaning estates that fall below this cutoff pay no estate taxes) and a max of 45%. “McCain’s law would raise the exemption and lower the tax rate. The effect would be to make more estates tax-free and reduce the tax rate (and take) on all estates,†says Simms.
The Arizona senator would extend and index the 2007 alternative minimum tax (AMT) patch and increase the exemption by 5% in excess of inflation after 2013. Under his plan, the dependent exemption would get a phased-in increase by two-thirds and the minimum corporate income tax rate would be phased from 35% to 25%. It would allow a first-year deduction of three- and five-year equipment and deny interest deduction and convert R&D credit to 10% of wages incurred for R&D. The plan would also replace exclusion from income for employer-sponsored insurance with a tax refundable credit of $2,500 for individuals and $5,000 for families.
Obama’s plan would make permanent select provisions of the president’s tax cuts, including child credit expansion, and would allow the cuts to expire for taxpayers earning more than $250,000 a year. He would make the estate tax cut permanent with a $3.5 million exemption and 45% rate. In addition, Obama’s plan offers a refundable “Making Work Pay Credit†of 6.2% up to $8,100 of earnings; a 10% Universal Mortgage Credit for nonitemizers; expand the childless Earned Income Tax Credit and Child and Dependent Care Credit; and eliminate income taxes for seniors earning less than $50,000 per year. He would mandate automatic 401(k)s and IRAs and offer income-related subsidies for health insurance.
Nancy Pfotenhauer, a senior policy adviser to McCain, says that the Republican senator is offering a pro-growth tax plan that focuses on generating economic growth and jobs. “He wants to keep tax rates low wherever possible, make changes that will improve the competitiveness of American companies in the global market, and make sure tax policies encourage job creation, not penalize it,†says Pfotenhauer.
BE Board of Economist member William Spriggs, who chairs Howard University’s economics department and is an Obama supporter, sees things differently. He says Pfotenhauer is right only if one believes there has been growth under Bush. “You have to ask yourself what did we get for the last eight years and
the answer is we got a housing bubble. If that’s their idea of growth then they’re going to be in trouble because that bubble burst. Millions of jobs have been lost and the other effect has been huge deficits, which was not pro-growth because the American savings rate lowered overall. That’s part of what has contributed to the decline in the dollar and the result of that, in part, is reflected in these higher gasoline prices,†says Spriggs. He asserts that by making the Bush tax cuts permanent, they will balloon and increase the deficit even further. “So, if McCain’s not going to give us the deficits of Bush, he will have to make very dramatic cuts in the federal budget, and the question is how and where,†says Spriggs.Pfotenhauer charges the tax cuts have been made controversial by the media because they’re attached to an unpopular president. She also says that many taxpayers, including middle-income earners who earn between $50,000 and $70,000, would be hurt by Obama’s capital gains proposal, which would increase the rate from 15% to 25%.
“There is a huge difference between the two candidates on tax policy. Obama has promised to raise taxes on income wages subject to the payroll tax as well as allow the capital gains rate to pop back up. He does nothing to lower the corporate tax rate which is the second worst in the world and is a serious
According to the Obama campaign, the capital gains tax rate for families making more than $250,000 would be somewhere between 20% and 28%. Startups and small businesses, as defined by the federal government, as well as seniors with annual incomes of less than $55,000, would be exempted from capital gains taxes. Spriggs adds that Obama recognizes the need to provide corporations with a workable tax system that also allows them to be profitable. At the same time, he argues, it is “mind boggling†to continue to give huge tax breaks to corporations such as the oil companies that are experiencing record profits by anybody’s standards in the history of corporate America. He says, “I think it’s an issue of ideology over effective governing; thinking about fairness throughout the system–what would actually stir economic activity–and what’s just simply giving people money. By making it more progressive, you lift people up from the bottom, help restore fairness both by having those at the top pay an amount which,
in the scheme of how our economy works, is fairer, and continue to lower the burden on those at the bottom.â€