Wednesday, July 8, 2020 9:03

McCain vs Obama: Economics

Posted by teppish on Tuesday, October 28, 2008, 16:34
This news item was posted in Economy, Politics category and has 4 Comments so far.

This is a very interesting article about the economic policies of both candidates. I will look at the article more closely in a bit (to verify mostly) and will return to comment in the comments section. Assuming this article interprets all the policies correctly, to summarize:

1. Obama’s promised revenue from increased taxes on the rich will be lower than advertised as there are instruments to get around paying higher taxes. This leads to a question of where will Obama get the money to fund his programs and not have a government revenue shortfall.

2. Under Obama’s plan, tax increases would hit 46.5%, not the pre-Bush tax rate of 39.6% as advertised.

3. Under Obama’s plan, the middle and lower classes would be dis-incentivized to earn higher income for fear of falling into higher brackets and losing credits.

4. McCain’s tax cuts will bring less revenue but not as much as feared. Also, the lower corporate tax rate will bring foreign investment.

5. Deficit will be higher under Obama than McCain but be bad under both.

6. By free-market standards, McCain is stronger than Obama.

7. The article touched on the health care plans for both candidates. I think McCain’s plan has the potential to reform the current health care structure more than Obama’s, but I am not sure if it’s positive or negative. Another issue to research.

McCain Vs. Obama: Economics
David R. Henderson 10.28.08, 10:07 AM ET

Predicting and analyzing the economic policies of either a President McCain or a President Obama is difficult for two reasons. The first reason applies to all candidates in all presidential elections: They often break their promises. But a second reason is unique to this campaign: Because President Bush, with his bailout, has moved the U.S. toward central planning of financial markets and because both McCain and Obama support this central planning, predicting a future president’s policies requires predicting how each would centrally plan the economy’s finances. No one can do that.

Even if candidates don’t keep many campaign promises, they often move in the direction they say they would move. So a look at the economic policies they advocate will probably tell us something about future directions. And the differences between Obama and McCain are quite striking–on taxes, spending and health care.

On taxes, McCain would preserve the Bush tax cuts, due to expire in 2010, and would cut the corporate income tax rate from 35% to 25%. Under his plan, high-income people would pay a top federal income tax rate of 35% and the lowest-income people would keep their rate of 0%.

Obama would preserve some of the Bush tax cuts, but would raise tax rates substantially on single taxpayers making $200,000 or more and on married couples making $250,000 or more. Their top rate would rise from 35% to 39.6%. Also, Obama would impose a further Social Security tax rate of 2% (for employees) to 4% (for the self-employed) on married couples whose income is $250,000 or more, making the top rate on earned income as much as 43.6%. Combined with the Medicare tax rate on earned income of 1.45% for employees and 2.9% for the self-employed, the top marginal tax rate on earned income could hit as high as 46.5%. By contrast, the top rate on earned income under McCain would be 35% plus 2.9%, or 37.9%.

Obama emphasizes that he would cut taxes for people with incomes below $200,000. Interestingly, though, he would not cut any tax rates on ordinary income. Instead, he would grant various tax credits and phase them out as people’s income increases. This means, ironically, that although many people’s taxes would be lower under Obama, their marginal tax rates would be higher. Within the income range over which the tax credit phases out, for every additional dollar the person makes, he loses some of the credit, adding an additional tax rate on top of the statutory tax rate. This means that not just high-income people, but also many modest-income people, would have a reduced incentive to make income under the Obama tax plan.

With such different tax proposals, you might expect substantially different effects on the federal government’s revenues. You would be right. Unfortunately, the main organization that has tried to estimate the effects of these tax proposals on revenues, the Tax Policy Center, an organization run by the Urban Institute and the Brookings Institution, has done a fairly poor job.

Alan Reynolds, an economist at the Cato Institute, has done a more careful job of estimating the effects of McCain’s and Obama’s tax proposals on revenue. His main finding about Obama’s proposal is that the large revenues Obama expects from raising marginal tax rates on the highest-income people will not be forthcoming because of the various tax-avoidance strategies they will engage in. These include switching their investments from taxable bonds to tax-free municipal bonds, becoming a one-earner family (the vast majority of high-income families have both husband and wife working, a main reason they are high-income) and increasing their 401(k) contributions. Obama’s higher marginal tax rates will lead to more federal government revenue, but not nearly as much as he claims.

And, concludes Reynolds, while McCain’s cut in corporate income tax rates will yield less revenue, the revenue loss is not nearly as much as the Tax Policy Center claims because the U.S. has one of the highest corporate tax rates in the industrial world and would, by cutting the tax rate, make the U.S. a more attractive place to invest.

On the budget side, Obama advocates substantial new spending on domestic programs and less spending on the Iraq war. McCain advocates continuing the high spending on the Iraq war and less spending on the domestic side but has not spelled out, other than ending the federal government’s subsidy to ethanol and a vaguely defined federal budget freeze, where he would cut. Asked by Jim Lehrer in the first debate which of his spending priorities he would give up to pay for the $700 billion bailout, Obama instead listed things he would not give up. It is difficult to estimate, therefore, the effect on the budget deficit that either would have. A reasonable bet is that the deficit, which some expect to hit the previously unimagined $1 trillion, or 7% of gross domestic product, in the current fiscal year, will be higher under Obama than McCain, but, in any case, will be obscenely high.

On trade, McCain favors free trade more strongly than Obama, although, according to Obama’s economic adviser, Austan Goolsbee, during the Democratic campaign for the nomination, Obama exaggerated his dislike of NAFTA.

On health care, the two are radically far apart. McCain would make all employer contributions to employees’ health insurance taxable as ordinary income, but would offset this few-thousand-dollar tax per family with a $2,500 tax credit for single people and a $5,000 tax credit for married people. Almost all people would end up with a net tax saving. McCain’s idea is to give people an incentive to be frugal health insurance purchasers because their cost of an additional dollar of insurance would be $1 rather than the less-than-one-dollar cost it is now when their employer provides it tax-free.

McCain would also let people buy insurance from other states under those states’ regulations so that, for example, if they wanted to buy from a less-regulated state where the government-mandated requirements are fewer and insurance premiums are lower, they could. Obama would move more in the direction of socialized insurance, providing a Medicare-like government plan for people under age 65 and expanding Medicaid. He would also require employers to provide health insurance for their employees or pay a tax instead.

While by free-market standards, McCain’s proposals are far superior to Obama’s, both have given away the store by voting earlier this month for central planning of financial markets.

David R. Henderson is a research fellow with the Hoover Institution, an associate professor of economics at the Naval Postgraduate School, and the editor of The Concise Encyclopedia of Economics (Liberty Fund, 2008).

Bookmark and Share
You can skip to the end and leave a response. Pinging is currently not allowed.

4 Responses to “McCain vs Obama: Economics”

  1. 28 October, 2008, 21:47

    I will break my responses into multiple comments. Regarding corporate taxes, currently most corporations pay NO TAXES, through various accounting methods. So lowering the corporate tax rate really doesn’t do anything.

    WASHINGTON (Reuters) - Most U.S. and foreign corporations doing business in the United States avoid paying any federal income taxes, despite trillions of dollars worth of sales, a government study released on Tuesday said.

    The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

    More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period, the report said.

    During that time corporate sales in the United States totaled $2.5 trillion, according to Democratic Sens. Carl Levin of Michigan and Byron Dorgan of North Dakota, who requested the GAO study.

    The report did not name any companies. The GAO said corporations escaped paying federal income taxes for a variety of reasons including operating losses, tax credits and an ability to use transactions within the company to shift income to low tax countries.

    With the U.S. budget deficit this year running close to the record $413 billion that was set in 2004 and projected to hit a record $486 billion next year, lawmakers are looking to plug holes in the U.S. tax code and generate more revenues.

    Dorgan in a statement called the report “a shocking indictment of the current tax system.” Levin said it made clear that “too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

    The study showed about 28 percent of large foreign corporations, those with more than $250 million in assets, doing business in the United States paid no federal income taxes in 2005 despite $372 billion in gross receipts, the senators said. About 25 percent of the largest U.S. companies paid no federal income taxes in 2005 despite $1.1 trillion in gross sales that year, they said.

  2. 28 October, 2008, 22:03

    I question the secondary analysis in so much as the Tax Policy Center is a bi-partisan group with several talented people. It is very easy to say that somebody did a poor job if it suits your agenda. I also note that this is an OpEd piece, as such you can write pretty much whatever you want without fear of losing credibility.

    I point this out because the comments on the health plan are incorrect. Only companies with over 100 employees will be included in the health care program. If those companies do provide health care, they will get a tax incentive. If they don’t they will have to contribute to a fund that would be used to help subsidizes low income folks. Taxing health benefits as income (as McCain wants to do) provides a direct incentive for companies to no longer provide health care. The problem with this is a lot of people today are able to get health care because they are part of a group plan at a company. In other words if you have diabetes, heart disease, cancer, HIV, MS or any other serious health issue you won’t be able to get health care AND if you had it before they can drop you after.

    The article also doesn’t mention the cost savings that bringing the $10 billion / month cost of the Iraq war to an end. I think it is fair to assume that those costs would reduce much more quickly under Obama.

  3. 7 May, 2016, 14:09

    What may be the best free blog to get a photographer to use?

  4. 2 August, 2016, 16:26

    Good read.

Leave a Reply