It would be a lie to say that either Republican John McCain or Democrat Barack Obama have all the answers to fix all that ails the U.S. economy.
The reality is that it took years for us to get into this crisis, and it will likely take years for us to climb out.
The events in recent weeks have illustrated that the U.S. economy faces complex problems related to its capital and housing markets.
In the 11th hour, President George W. Bush proposed a $700 billion bailout of the nation’s private financial sector last week.
In effect, we would be bailing ourselves out. But at what cost?
The reality is that the record national debt will likely prevent the next president, ambitious and bold as he may be, from having any discretionary funds to do anything about reforming the health care system, Medicare or Social Security, much less to rebuild the nation’s infrastructure.
Still, voters will have two choices on Nov. 4: John McCain or Barack Obama. Which one stands the best chance of reviving the American economy?
In many respects, the party in control in Washington, D.C., decides how wealth is collected and redistributed.
The table accompanying this report lists the federal tax impact of both candidates’ economic plans on individual citizens. The data was compiled by the Tax Policy Center, an independent project of the Urban Institute and Brookings Institution.
A quick look at the table reveals the following truths:
McCain plans to cut the taxes of every American citizen.
McCain’s largest tax cuts would be for citizens with annual incomes of more than $227,000.
Obama plans to raise the taxes for citizens with annual incomes of more than $227,000.
Obama would provide greater tax cuts for the middle class and lower-income people.
Of course, with the federal deficit likely to continue to swell in the aftermath of the government bailouts for the private sector and the ongoing wars in Iraq and Afghanistan, it remains to be seen if any tax cuts will see the light of day.
In this special report, SBT examines the economic planks of both McCain and Obama. Our hope is to provide clarity to the facts of their agendas, without the noise of the television commercials or the bluster of the debates.
One thing is certain. The winner of this election will inherit this mess.
The McCain Economic Plan
Preserving and growing American jobs has become a central theme of the campaign for Sen. John McCain, the Republican Party nominee for president. The McCain campaign proposes cutting the federal corporate tax rate to 25 percent from the current 35 percent rate, said Doug Holtz-Eakin, senior economic advisor to the McCain campaign.
By cutting the corporate tax rate, the campaign believes the United States will be better-positioned to attract and retain corporations, which will ultimately translate into more jobs, he said.
“The fundamental goal is to stop driving good American jobs overseas,” Holtz-Eakin said. “We’ve seen this bleed of the better jobs, the ones with health and retirement benefits, to the Indias, the Chinas and Irelands of the world.”
With a lower tax rate, more American companies will keep their corporate headquarters in the United States, Holtz-Eakin said. The McCain campaign also plans to make a research and development tax credit permanent, which also will help attract and retain corporations, he said.
The country currently has an R&D tax credit program, but that program is now renewed on a temporary basis, Holtz-Eakin said. The current program also is complicated, he said.
“The biggest improvement would be to pass it and make it permanent,” he said. “The way it works right now is basically – Congress holds up the guys who do a lot of R&D for campaign donations, they extend (the program) for a year and they hold them up again and extend it for a year. This has been going on for a long time, and the game’s got to stop.”
The McCain campaign has proposed a first-year business tax deduction for new equipment and technology, which is designed to dovetail with its corporate tax reduction and proposal to make permanent the R&D credits.
“It’s meant to take the R&D credit, which gives you innovation, and put it into the equipment and get it in place,” Holtz-Eakin said. “If the headquarters is here and the research is here, the manufacturing facility will be here. There are those spatial linkages there, and that’s what we want to have happen.”
The McCain campaign plans to create a National Commission on Workplace Flexibility and Choice to modernize labor laws and help two-income families with young children, Holtz-Eakin said.
“(America has) large issues with two-income couples juggling their lives,” he said. “(McCain would) like to see the commission take a comprehensive look at both the labor laws and full- and part-time distinctions and also what can be done to support tele-work.”
Health care and taxes
McCain has proposed several changes to the American health care system, the most significant being a $5,000 tax credit for health care for every American family. The credit would apply either toward work-provided health insurance or for families without insurance to put toward buying a policy, Holtz-Eakin said.
“We believe if you put $5,000 for a family on the table and open up the insurance market for fair competition, you will see good results,” he said.
If elected, McCain has promised to reform the nation’s federal unemployment programs. The country now has six different unemployment programs, Holtz-Eakin said, and McCain wants to streamline them into one program.
“We have about $40 billion in the United States devoted to unemployment insurance and displaced workers, and we still have a very haphazard system,” he said. “The senator thinks there should be a single cohesive training program, which would be available to everyone who is displaced.”
McCain’s reformed federal unemployment program would focus on retraining workers who have lost their jobs and helping them find new careers, Holtz-Eakin said, partnering with community and technical colleges.
“(Technical and community colleges) have the best track record of tailoring courses to the business environment in their community, bringing the skills they need to local employers and getting them back to work quickly,” he said.
McCain also plans to create a new income tax code in the United States, Holtz-Eakin said. The new code will be similar to the X-tax system designed by David Bradford, a tax economist, and will use a graduated rate schedule, Holtz-Eakin said.
The new tax code will be implemented as an alternative to the current federal tax code, and citizens will be able to elect to enroll in either system.
“The key here is to recognize that while everyone wants a simpler tax code, a simpler tax code has never made it through the Ways and Means and Senate Finance committees,” Holtz-Eakin said. “(McCain’s) approach is to provide an alternative that people could elect into and once they were in they would stay in. The idea is to put one out, get it to revenue neutral, have a simple structure, a minimal number of rates, large exemptions and go from there.”
McCain supports lifting the federal ban on offshore oil drilling, as well as increasing funding for clean coal power generation and expanding the number of nuclear power plants in the United States, Holtz-Eakin said. The senator has pledged to spend $2 billion annually on new research and project development to advance clean coal technology, and has said repeatedly that he wants the U.S. to develop at least 45 new nuclear energy plants by 2030.
“Coal is our most abundant energy resource and we have to find a way to burn it cleanly and in a world of global warming, sequester the carbon,” Holtz-Eakin said. “Nuclear power will receive tremendous incentives (under a McCain presidency).”
Wall Street regulation
The McCain campaign is calling for a broad-based federal investigation of the recent Wall Street collapses and the proposed federal bailouts of Fannie Mae, Freddie Mac and American International Group Inc. (AIG and a bankruptcy filing by Lehman Brothers. The investigation would consist of a bipartisan fact-finding commission, help create bipartisan action and create a criteria for government oversight, Holtz-Eakin said.
“You have to have a safety and soundness regulator for every financial institution that can look at them with greater clarity than we do now with some transparency on the derivatives, perhaps a clearinghouse so that we can get net positions every day and the distinction between on and off balance sheet activity curtailed so you can actually see their condition,” Holtz-Eakin said. “And (it needs) the ability to shut them down or take them over if they get into trouble.”
Any future bailouts will need to severely limit golden parachutes for executives of companies that are being financially rescued, Holtz-Eakin said.
“It insults common sense to see some of the executives walk away with these multi-million parachutes, having driven institutions into the ground,” he said. “And finally, you have to have some sort of system stability check so that we can make sure that we are not endangering Main Street as Wall Street does its business.”
How would your taxes be affected?
This graph estimates the impact of the candidates’ plans on the taxes paid by American citizens, broken down by annual income levels.
Average Change of Income McCain Obama
- Over $2.9 million -$269,364 +$701,885
- $603,000 and up -$45,361 +$115,974
- $227,000-$603,000 -$7,871 +$12
- $161,000-$227,000 -$4,380 -$2,789
- $112,000-$161,000 -$2,614 -$2,204
- $66,000-$112,000 -$1,009 -$1,290
- $38,000-$66,000 -$319 -$1,042
- $19,000-$38,000 -$113 -$892
- Under $19,000 -$19 -$567
Source: The Tax Policy Center, an independent project of the Urban Institute and Brookings Institution.
- Create a more simple tax code that people can opt into, but retain the current tax code for those who prefer it.
- Maintain the top tax rate of 35 percent and 15 percent rate on dividends and capital gains, but phase out the Alternative Minimum Tax.
- Reduce the estate tax to 15 percent and permit a $10 million exemption.
- Create a $5,000 tax credit for families and a $2,500 credit for singles to be used to purchase health insurance.
- Ban Internet sales taxes and new cell phone taxes.
- Institute a summer gas tax holiday.
- Double the personal exemption for dependents from $3,500 to $7,000.
- Encourage job growth through exports.
- Lower barriers to free trade, level the global playing field and build effective global trading rules.
- Lower the corporate tax rate to 25 percent from 35 percent.
- Make the R&D tax credit permanent and simplified.
- Create a first-year tax credit for new equipment and technology.
- Overhaul federal unemployment programs, streamline current programs into one agency and focus programs on retraining and putting people back to work.
- Lift restrictions to domestic oil and natural gas exploration.
- Invest $2 billion per year to advance clean coal technology.
- Put the nation on track to build 45 new nuclear power plants by 2030.
- Encourage the market to develop alternative sources such as solar, wind and hydro power.
- Reform laws and regulations regarding oil speculation on the oil futures market.
The candidates on the campaign trail in Wisconsin – photos by Paul Gaertner.
The Obama Economic Plan
The campaign for Sen. Barack Obama, the Democratic Party nominee for President, has laid out an economic plan for the country that includes eliminating or reducing the capital gains taxes on small and start-up businesses, and providing more access to venture capital for women-owned, minority-owned and small businesses.
“Eliminating the capital gains tax, or reducing them, rather is a key part of delivering the kind of small-business relief people need in this country,” said Phillip Walzak, Wisconsin communication director for Obama for America. “Obama has a plan that will help women-owned, minority and small businesses by providing meaningful tax relief that is going to have an enormous impact on the economy.”
The Obama campaign says his overall tax plan focuses primarily on helping the middle class – families earning less then $250,000 a year.
“Any family who makes less then $250,000 a year will not see a tax increase,” Walzak said. “Above that, you will see a modest increase. Obama’s tax relief and job creation goes directly to the working families. It doesn’t need to trickle down through wealthy class tax relief for them to reap the benefits,” he said.
According to the Tax Policy Center Urban Institute and Brookings Institution, a non-partisan institution based in Washington D.C., Obama plans to extend the 2001 and 2003 tax cuts for families earning less then $250,000.
He also plans to introduce a refundable “making work pay” tax credit of $1,000 to working families and eliminate income tax for seniors earning less than $50,000.
For families who make $250,000 or more annually, Obama’s plan would increase taxes significantly.
“The goal of the Obama tax plan is to provide tax relief throughout this country,” Walzak said. “It is a reasonable shift, given that in the past eight years the wealthy have significantly benefited from the Bush administrations tax cuts. The Obama plan shifts the relief to the people who really need it in today’s economy.”
Obama believes that the housing market bust is a root cause of the current financial crisis, and millions of middle- to low-income Americans can’t take advantage of the existing tax deduction for mortgage interest because they don’t itemize their taxes, Walzak said.
“An Obama administration wants to work to stabilize the housing market while helping families buy homes and stay in their homes by creating the universal mortgage tax credit,” he said.
The credit will be worth 10 percent of what non-itemizing families pay in mortgage interest and will be capped at $800 in tax credits per year.
“We estimate the plan will give 10 million homeowners an average of $500 in annual tax relief,” Walzak said.
The Obama campaign’s plans to stimulate the economy also include a second round of stimulus checks provided directly into the hands of the American consumers who need it, Walzak said.
“I think Obama’s stimulus plan is a very broad agenda. Over 10 years, he plans to re-invigorate the green job sector, invest in new technologies and job training to re-spark that industry,” he said.
The Obama administration would make the research and development and the renewable energy tax credits permanent, and reward businesses that create jobs in the United States with tax credits and invest in U.S. manufacturing and sciences.
Obama also has a plan to reduce health insurance costs by about $2,500 for a typical Wisconsin family, Walzak said.
“Currently our health care industry wastes tens of billions of dollars a year on unnecessary paperwork, mismanaging chronic health conditions like diabetes, and is only made worse by the lack of competition in the health insurance industry,” Walzak said.
Obama plans to invest in health care information technology, allow safe importation of cheaper drugs from Europe and Canada and emphasize the use of generic prescriptions.
Obama has proposed a “Health Insurance Exchange” national plan to promote private health insurance plans. This, according to Walzak, will ensure every American will have access to health insurance they can afford, without going through an employer or being denied because of pre-existing medical conditions.
According to the Tax Policy Center, Obama’s plan would provide subsidies that decrease with income, mandate health insurance coverage for children, penalize employers who fail to provide insurance to employees and provide subsidies for small employers who do. The Obama plan would reduce the number of uninsured Americans by about 18 million in 2009 and 34 million in 2018, according to Center, which also estimates that his plan would cost around $1.6 trillion over 10 years.
Financing their proposals is going to be a major concern for either presidential hopeful.
The Obama campaign says he plans to eliminate wasteful spending and earmarks and reallocate funds with in the budget to pay for his proposals.
“Right now, we are spending $10 to $12 billion a month in Iraq,” Walzak said. “I think if we begin to see a shift of how our resources are allocated we will see sufficient funds, and be able to invest those resources here at home. Above all, Obama seeks to change the way things are done in Washington. He wants to make sure if you borrow from the government you are regulated, he wants to increase transparency to prevent abuse of groups and companies acting without a lot of oversight and make a better effort to reduce fraud and corruption.”
- Refundable Making Work Pay tax credit. $1,000 for working families, $500 for individuals.
- Universal Mortgage Credit. 10 percent of mortgage interest for non-itemizing taxpayers capped at $800.
- Eliminate income tax for seniors making less then $50,000 per year.
- First-time new farmer tax credit.
- Make research and development tax credit permanent.
- Make renewable energy production tax credit permanent.
- Child dependent care tax credit refundable and allow low income families to receive 50 percent credit for child care expenses.
- Make saver’s credit refundable and change to a 50 percent match of the first $1,000.
- American opportunity tax credit. Provides $4,000 for college in exchange for community service.
- Mandate automatic 401(k)s and automatic IRAs.
- Increase maximum capital gains rate to 20 percent.
- Provide a capital gains tax break for landowners selling to beginning family farmers.
- Restore 36 and 39.6 percent income tax rates.
- Restore personal exemption and Pease phaseouts for households making more then $250,000 and increase the threshold.
- Extend the 2007 alternative minimum tax patch.
- Make permanent the estate tax with $3.5 million exemption at 45 percent rate.
- Impose additional tax of 2-4 percent on families making $250,000 for social security/payroll.
- Twenty percent tax credit on up to $50,000 of investment.
- Eliminate/reduce capital gains tax on small and start up businesses.
- Increase amount of loans approved and access to venture capitol for women-owned and minority-owned businesses.
- Provide emergency relief for small businesses affected by price increase of oil, gas etc.
- Small businesses health tax credit- provide subsidies for small businesses who choose to provide healthcare for employees.
- Provide subsidies that increase with lower incomes.
- Mandate insurance coverage for children.
- Penalize employers who fail to provide insurance.
- Provide subsidies for small businesses who provide health insurance.
- Invest in health care information technology and preventative measures.
- Allow safe importation of cheaper drugs from Europe and Canada and emphasize the use of generic prescriptions.
- Promote private health insurance plans in order to guarantee access to individuals who can’t get employer offered coverage or were denied due to pre-existing conditions.