A amiliar call or change
Tax platorms o the presidential candidates
Following party orthodoxies
Both McCain and Obama have denite ideas on the direction in which they would take theincome tax system. But despite their emphasis on change, their proposals as articulated thus arin the campaign refect the very traditional debate over how progressive the tax system shouldbe — that is, how the burden should be distributed between the middle class and the wealthy.McCain’s tax plan would take an orthodox Republican approach by maintaining the 2001and 2003 Bush tax cuts, increasing the estate tax exemption while decreasing the tax rate,increasing the personal dependent exemption or individual taxpayers, and lowering corporatetax rates. McCain also has stated that he will oppose any new taxes as a means to und hisproposals. This robust plan represents a signicant commitment to slashing governmentspending i decits are to be controlled. According to an analysis by the nonpartisan Tax PolicyCenter (TPC), the McCain tax plan would result in ederal revenues equal to 17.6 percent ogross domestic product (GDP). For the 2007 through 2009 scal years, revenues are projectedto average 18.4 percent o GDP and spending 20.8 percent.Obama ollows Democratic orthodoxy by proposing higher taxes on the wealthy (which hiscampaign denes as joint lers with annual incomes above $250,000 and single lers withincomes above $200,000) to pay or tax cuts and benets or the lower and middle classes.Like the McCain plan, Obama’s tax plan seems to imply a commitment to signicant spendingreductions. According to the TPC analysis, the Obama tax plan would result in ederalrevenues equal to 18.2 percent o GDP.Both candidates are committed, in general terms, to closing largely unspecied business andother perceived loopholes. Interestingly, neither is calling or a wholesale replacement o thecurrent income tax system or the enactment o a new additional tax, such as a national retailsales tax or a value-added tax.
The big picture
The McCain and Obama tax plans can be analyzed in three large pieces: individual income taxproposals, estate tax proposals, and business income tax proposals.With respect to individual income taxes, both candidates would reduce collections belowthe aggregate amounts collected under present law, but they would do so very dierently.McCain would make virtually all o the Bush tax cuts permanent and extend urther tax relieto amilies with children or other dependents. In the aggregate, Obama would, based on TPCnumbers, collect less in individual income taxes than McCain, but he would do so by raisingtaxes on joint lers earning more than $250,000 and individuals earning more than $200,000while preserving the Bush tax cuts or taxpayers alling below that income level and adding anarray o specially targeted tax incentives and reundable tax-relie provisions.Both candidates would create an estate tax system that exempts all but a tiny raction oestates rom tax. Taxable estates would ace very dierent burdens due to a lower exemptionand higher tax rate on the remaining value. Over a 10-year period, estate tax collections underthe Obama plan would exceed collections under the McCain plan by about $300 billion.In terms o total revenue collections, the most dramatic dierence between the twocandidates may be in their treatment o corporate taxes. McCain would provide a signicantnet reduction in corporate tax burdens through a reduced corporate tax rate, but would osetsome o that reduction through the elimination o “corporate welare” provisions in the taxcode. Obama has expressed support or lowering the corporate rate as well, but proposesto raise signicantly higher revenue through specic revenue osets and other unidentied“loophole” closers.
Is undamental tax reormon the horizon?
Neither candidate is discussing proposals toundamentally reorm or replace the currenttax system. McCain, however, has suggestedallowing individuals to determine their taxesunder an optional alternative two-rate taxsystem with a generous standard deductionand increased personal exemption. Obamaoers to provide standard-deduction lerswith prelled-in tax orms that they canveriy and submit.In the past, tax reorm has occurred atera substantial period o consensus buildingabout the kinds o tax to impose and thelevel o revenue that is required. We do notsee such an emerging consensus. Reormlikely cannot become a reality until Congressand a president begin to agree on how todeal with the rapid growth o entitlementspending and other issues.
The sources or our analysis
This document relies on a variety osources, including the McCain andObama campaign Web sites and analysesrom the Congressional Budget Oceand congressional Joint Committee onTaxation. We also have relied heavily onextensive reporting on, and analysis by,the nonpartisan Tax Policy Center, whichpublished “An Updated Analysis o the 2008Presidential Candidates’ Tax Plans.” The mostcurrent version o the analysis is available atwww.taxpolicycenter.org. We relied on theSeptember 12, 2008, update.