Truth, Lies and In Between

Senators John McCain (R-AZ) and Barack Obama (D-IL) have released tax plans indicating their priorities when one of them becomes President of the United States. These plans involve significant changes to the federal tax system. While numerous blanks and vagaries remain in both plans, much of their respective plans are now clearly laid out.

As expressions of tax policy design, the two tax plans share the unfortunate attribute of adding to tax complexity. In other respects, the McCain proposal significantly advances good tax policy by emphasizing lower rates while the Obama plan raises tax rates. The Obama plan also suffers in its proliferation and expansion of refundable tax credits, further (and inappropriately) using the income tax system as an income support system.

The Heritage Foundation’s Center for Data Analysis (CDA) has a detailed overview of the two plans and an assessment of their economic effects.[1] According to CDA, by 2018 the economy would be more than $320 billion larger (after inflation), and average household income would be more than $2,600 greater under the McCain plan than under the Obama plan.

Either Republican Senator John McCain or Dem­ocratic Senator Barack Obama will have to make very important decisions on tax policy when he takes office in January 2009. First, the U.S. econ­omy will be recovering from the financial crisis and is already predicted to grow less than its usual rate of 3.3 percent over the last 50 years.[1] Second, Pres­ident George W. Bush’s tax cuts will expire in 2011, and the President must decide how to extend or make permanent some of the tax cut provisions.

Senator McCain will make the Bush tax cuts per­manent, with the exception of the estate tax. McCain credited the Bush tax cuts with helping the economy recover after the 2001 recession.

Senator Obama, on the other hand, will extend the Bush tax cuts only for those taxpayers who earn less than $250,000 a year—he has deemed the rest of the people “rich.” Senator Obama will also enact new tax increases on these rich individuals as well as a series of targeted tax credits for lower-income indi­viduals. Senator Obama believes that the current tax system is not progressive enough and that higher taxes on the rich should be used to give money to low-income individuals or those who do not work at all, such as retired people, reduce the deficit, and reduce the size of Social Security’s shortfall.

A recent Heritage Foundation Center for Data Analysis report[1] describes the economic outcomes that can be expected based on the presidential candidates’ proposed tax plans. The outcomes include the effects of these proposed policies on gross domestic product, disposable income, and employment growth over a 10-year period.

The analysis finds that job growth under Senator John McCain’s (R–AZ) plan at the national level is more than two times faster than job growth under Senator Barack Obama’s (D–IL) plan. Table 1 shows the average yearly employment gain that can be expected in each state as a result of McCain’s and Obama’s tax plans.[2]

Job creation grows faster in McCain’s plan because of the plan’s pro-growth provisions. The McCain proposal includes lower tax rates for businesses and allows businesses to deduct the cost of new purchases of equipment and technology in the first year. Both of these proposals lower business expenses, leaving more money for business owners to use for employment and operation purposes. Owners will use this money to hire new staff, purchase more materials, and invest more in research and development activities.