Obama vs. McCain: Taxing and Spending

The candidates' opening salvos reveal widely different views. Obama calls current policy "the most fiscally irresponsible in our history"

by Jane Sasseen

They've parried over gas taxes (BusinessWeek.com, 4/15/08) and fixes for the housing crisis. Now, as the general election campaign kicks off, Senators Barack Obama and John McCain have begun to hammer away at each other's tax and spending programs.

Obama, who has begun a two-week tour around the country to highlight his views on the economy, derides McCain's plans to extend the Bush Administration's tax cuts, eliminate the Alternative Minimum Tax, and slash corporate taxes. Campaigning in St. Louis on June 10, Obama called the current Administration "the most fiscally irresponsible in our history" and argued that McCain would be even worse. "I've said John McCain is running to serve out a third term, but when it comes to taxes, that's not being fair to George Bush. Senator McCain wants to add $300 billion more in tax breaks and loopholes for big corporations and the wealthiest Americans," Obama said.

As McCain revs up his campaign, he has wasted no time in trying to paint Obama as a typical tax-and-spend liberal. He argues that if the Senator from Illinois is elected, America is in store for the biggest tax increase since World War II. "Under Senator Obama's tax plan, Americans of every background would see their taxes rise—seniors, parents, small business owners, and just about everyone who has even a modest investment in the market," McCain said in a speech to the National Small Business Summit in Washington, also on June 10.

First Round to Obama

So where does the reality lie? According to a new analysis by the nonpartisan Tax Policy Center, a joint venture between the Urban Institute and the Brookings Institution, two Washington think tanks, this round goes to Obama. The TPC took a look at the various tax proposals put forth by the two candidates and estimated that Obama's plan would lead to a boost in aftertax income for all but the highest earners, while taking a smaller bite out of government tax revenues than would McCain's plans.

Len Burman, a former Treasury tax official who is now a senior fellow at the Urban Institute, says if Obama's proposals—which include plans to rescind the Bush tax cuts on couples making more than $250,000, close corporate tax loopholes, and tax private equity earnings known as "carried interest" as ordinary income—were adopted in 2009, for example, married couples with earnings in the lowest quintile of the population would see their aftertax income rise 5.8%. Those in the next quintile would see an increase of 4%. Those breaks would be paid for by those with high incomes: the top 1% of taxpayers would see aftertax income fall 8.4%.

Under McCain's proposals, by contrast—including an extension of the Bush tax cuts for all taxpayers, a corporate tax cut, and a larger reduction in estate taxes than Obama would support—far more of the benefits would go to the top. If his plans went into effect in 2009, married couples in the bottom fifth of the population would see aftertax income go up just 0.2%, while those in the next quintile would see a 0.7% hike. But those in the top quintile would see a bump up in aftertax income of 2.7%.

"It's just flat wrong" to say people would do worse under Obama, says Burman. "Most lower- and middle-class people would pay less taxes under Obama than they would under the proposals being put forth by McCain."

Doug Holtz-Eakin, McCain's top economics advisor, argues that the study doesn't take into account which policies might prove better for jobs and the economy, or how companies or individuals might behave in reaction to changing tax rates. Cutting the corporate tax rate, for example, is intended to keep jobs in America, he says.