The Great Tax Debate: Obama Vs. McCain

By Blake D. Dvorak
Assistant Editor
Real Clear Politics

The debate between John McCain and Barack Obama has, not surprisingly given the financial meltdown of the last few weeks, come down to one of economics. Central to either candidate's economic proposals are their tax plans. But there is much disagreement about what each plan will do.

Before getting to the discrepancies in each candidate's tax proposals, let's start with the basic facts. First, taken together, Obama's plan will raise taxes. His proposal would roll back the 2001 and 2003 tax cuts for taxpayers in the top two income brackets, meaning that taxpayers who were paying marginal rates of income tax of 35% and 33% would start paying 39.6% and 36%, respectively. Obama also intends on increasing the capital gains and dividend tax to 20% from 15% for those making above $250,000 a year.

McCain plans on making permanent the 2001 and 2003 tax cuts for the upper income earners. Unlike Obama, he plans no tax further tax cuts for the middle class, aside from increasing the the dependent exemption to $6,000 from $3,500.

Now to the campaigns' critiques. For his part, Obama argues that McCain's tax proposals are simply an extension of the Bush Administration's policies. Obama calls McCain's plan "tax cuts for the rich" and promises to cut taxes "for 95% of working Americans."

McCain argues that Obama's tax plan is nothing short of "welfare" and has even used the term "socialist" on the stump. Obama's answer to "Joe the Plumber" about how he simply wants to "spread the wealth around" has become a central talking point in the Republican's assaults on the front runner.

James Kvaal, a Senior Fellow at the Center for American Progress, a liberal think tank, takes issue with McCain's contention that Obama's tax plan is redistributive.

"Every change in the tax code helps some taxpayers and hurts other tax payers," says Kvaal. "What the Obama proposal intends to do is restore some of the tax rates that were in place in the 1990s. So that's not an effort to redistribute wealth; it's a recognition of the growing inequality that's happened in the last eight years."

But what about Obama's claim of a middle class tax cut for "95% of working families"? Not so fast, says Ryan Ellis of the conservative Americans for Tax Reform.

"He's not cutting rates anywhere," Ellis says, "He's providing for tax credits."

One tax credit Obama is proposing is that of $500 to individuals or $1,000 to couples to offset the payroll tax on the first $8,100 in earnings.

The McCain campaign has called this kind of tax cut, or tax credit, "welfare," since middle-income earners would essentially receive a check from the government. But Bill Gale, Co-Director of Tax Policy at the Brookings Institution says McCain is being disingenuous on this count.

"The refundable tax credits are supported by McCain himself," says Gale. "That's the neat feature of his health insurance plan, is a refundable tax credit. So for him to go after Obama on that issue makes no sense at all."

Furthermore, says Gale, "The only way to have a tax system where you don't 'share the wealth' is for everyone to pay exactly the same dollar amount in taxes; not the same the rate, the same dollar amount."

It's a distinction that Chris Edwards, Director of Tax Policy at the Cato Institution, a libertarian think tank, says is a moot point when it comes to taxes.

"Both candidates are offering tax cuts," says Edwards. "But it depends what you mean by tax cuts. Obama would increase taxes compared to the amount of taxes Americans would pay this year in 2008. McCain would cut taxes compared to amount Americans pay in 2008."

True, says Kvaal, but "it's an effective way to accomplish what Obama is seeking to accomplish: the largest is the workers' tax credit which reduces the impact of payroll taxes, which is a good way to boost the income of middle-class families."

Another central difference between the McCain and Obama tax proposals has to do with corporate tax rates. The United States currently has the second highest corporate tax rate in the world at 35%. McCain plans to lower that to 25%. Obama's policy calls for closing corporate-tax "loopholes" and treat foreign-sourced income as domestic income.

Obama argues that McCain would cut taxes for companies that ship jobs over seas, thereby encouraging more job flight. McCain, and like-minded economists like Edwards, say that the best way to keep corporations from hiring abroad is to cut their tax rate.

However voters come down on these discrepancies, there's a clear difference in ideology. As Gale says, "McCain is Bush on steroids. And Obama is more like revisiting the Clinton administration's tax policy."

Edwards isn't as hopeful. Obama's tax proposals are, he says, "a horrible direction for tax policy."