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The Democratic Presidential nominee's acceptance speech marks the beginning of a drive to win voters over with more specific ideas for how to help the economy By Jane Sasseen
The nomination of Illinois Senator Barack Obama for President at the Democratic National Convention in Denver on Aug. 28 had the kind of over-the-top ending you'd expect from a political party sensing a chance to capture the White House with a charismatic, history-making candidate. Following performances by Stevie Wonder and Will.i.am before an ecstatic crowd of 75,000 at Denver's Invesco Field, Obama accepted his party's nomination in a passionate speech. Perhaps more important, with a heavy focus on the economy, Obama began the hard work of convincing American voters that he can deliver solutions to the economic woes they now rank as their No. 1 concern. "Unlike John McCain, I will stop giving tax breaks to corporations that ship our jobs overseas, and I will start giving them to companies that create good jobs right here in America," Obama said. "I will eliminate capital-gains taxes for the small businesses and the startups that will create the high-wage, high-tech jobs of tomorrow.…And for the sake of our economy, our security, and the future of our planet, I will set a clear goal as President: In 10 years, we will finally end our dependence on oil from the Middle East." With the convention behind him, Obama has to confront some unpleasant realities. By many measures, he should be capitalizing on the economy's distress to build a sweet electoral lead. He hasn't. At the moment voters rank Obama and Republican rival McCain equally on their ability to address the economy's troubles. His often lofty rhetoric and focus on criticizing McCain and the Bush legacy have yet to convince many that he can turn the economy around or improve their lives.
That's why many of the convention speakers, from Obama himself, wife Michelle, and on down the list, spent big chunks of their time before the prime-time cameras emphasizing Obama's deep middle-class roots. Even as the McCain campaign tries to tag him as an out-of-touch elitist, Obama is ramping up his efforts to connect with voters, sharpen the contrast between his vision for the economy and that of McCain, and convince them he is the best candidate to help restore the economy and rebuild the American dream. His clear message is that he understands their woes because he has struggled with the same problems they have, such as paying off college loans and coming up with the money to pay bills.
That's also why Obama supplemented the high-flying talk of change, which many Americans have heard, with greater details about the middle-class tax cuts, investments in alternative energy, expanded health-care coverage, and other programs he proposes to help the American economy and its struggling families. Despite his support for a long list of such programs, many voters still don't know what Obama would do. "So let me spell out exactly what that change will mean," Obama said. "I will cut taxes— cut taxes—for 95% of all working families, because in an economy like this, the last thing we should do is raise taxes on the middle class." Obama still appears to be garnering a lower share of white working- and lower-middleclass voters than he may need to win. That problem remains particularly acute in the smaller towns and older manufacturing areas that have been hardest hit by the economic downturn. Pollster Stanley Greenberg, a Democratic consultant who played a key role in designing the "It's the Economy, Stupid" strategy that helped get Bill Clinton elected President, says many of these voters are frustrated and angry. They want a new direction, but they don't know enough about Obama or if he is one of the "elites" they believe have sold them out. The real problem is among older voters, who remain most resistant to Obama's appeals. In recent polling done by Greenberg, Obama's support among older white Democrats was significantly below the tallies racked up by 2004 Democratic contender John Kerry, as well as the numbers Democrats generally received in the 2006 elections.
Neutralizing a McCain Advantage
Obama's advisers deny they face significant problems with such working-class voters. Dan Pfeiffer, Obama's communications director, points out that Obama is doing better with younger "lunch-bucket voters" at this point in the election than either Kerry or Al Gore did. They also argue that the prospect of large numbers of disgruntled Hillary Clinton backers abandoning Obama for McCain has not only been much exaggerated, but largely put to rest by Bill and Hillary's feisty speeches backing Obama in Denver. Moreover, Obama doesn't have to win a majority of working-class or white voters. Even Bill Clinton didn't. But he does have to gain enough to neutralize McCain's advantage with this bloc. That's particularly true in such critical battleground states as Michigan, Pennsylvania, and Ohio, with their large blocks of struggling blue-collar voters. Obama's efforts to raise turnout, which could lead to a greater share of voters in his camp, such as African Americans and those under 30, could also help offset any disadvantages he has with other voters. Thomas Riehle, a strategist and Democratic pollster who heads Washington-based RT Strategies, looks at the count this way: Even assuming Obama boosts turnout among black voters to around 12.5% of the electorate from the roughly 10% it has been in recent elections, he figures Obama will still need 41% of white voters in order to grab the prize.
"To get there, he will need 37% of whites over 50, and he's short of that now," says Riehle. Moreover, polls taken before the conventions show that despite the long primary campaign, somewhere near a quarter of voters are still undecided. "It's a huge number, it's persistent, and it's growing," says Riehle.
Those numbers appear to reflect the success McCain has had in raising questions about Obama's experience and background with a harder-hitting campaign in the weeks before the Democratic convention. The Arizona Senator's support for offshore drilling, as well as his frequently repeated claims that Obama will raise taxes, may also be hurting, while the Russian invasion of Georgia may also have helped McCain by reminding voters of the foreign policy challenges ahead. All that is affecting the critical independent voters as well; a poll released days before the Denver show got under way, done jointly by the Democratic firm Lake Research Partners and the Republican firm the Tarrance Group, found a large swing among the 22% of voters who identified as independents. While they favored Obama over McCain in May, by August they had swung into McCain's camp. "That obviously has to be turned," says Lake Research head Celinda Lake. "He's got to define more clearly the economic distinctions between himself and the McCain/Bush economic policies." Obama's advisers believe much of the problem simply lies with the fact that most voters still don't know much about him. "The issue is really whether people are paying attention—a lot of voters don't know yet where he stands on the economy, or the sharp contrasts with John McCain," says Jason Furman, Obama's lead economic adviser. "The more they learn about our policies, the more they come over to our side." On the stump before the convention, Obama redoubled efforts to sharpen his economic message. Big venues have given way to talks in town halls with smaller crowds over the pocketbook issues that concern them. Those efforts will continue.
Striking a Balance
Around Denver, many close to the campaign argued that Obama has gone a long way this week toward making the types of changes that will help close the sale. But there was no shortage of suggestions as to what more he needs to do. Dick Durbin, the senior Senator from Illinois and an adviser to the campaign, says the more specific Obama can be, the better, to counter voters' skepticism about politicians promising to improve people's lives. "People are real cynical," Durbin says. "They've seen a lot of that." Obama, he adds, must be "as close to street level as possible." Labor leaders like Andy Stern, president of the Service Employees International Union, argue that what Obama needs is a heftier dose of populism, more directly taking on the
oil companies and others who, he says, have benefited unfairly from an uneven playing field that has left ordinary Americans struggling. But others caution against going too far. Will Marshall, the president of the Progressive Policy Institute—the think tank for the moderate Democratic Leadership Council, which helped develop many of the more centrist economic ideas that former President Bill Clinton adopted—warns that frustrated as they are, these voters are motivated by their aspirations for a better life. "They want to climb themselves, rather than tear others down," Marshall says. In winning his election, Clinton was able to find a balance between speaking to struggling voters' desire for more economic security and to their aspirations for expanded opportunity. As the Presidential race heads into the final stretch and Obama sharpens his economic pitch, his challenge will be to do the same.
Why Their Economic Plans Don't Add Up
A rocky economy means the gap between campaign promises and governing realities may be larger than ever this year
As he crisscrosses the country in his quest for the Presidency, Senator John McCain frequently repeats his vow to keep today's low income tax rates in place, take a further whack at the estate tax, and ease the tax burden on business. "I want to look you in the eye," he said at a July 30 town hall meeting at a local Caterpillar (CAT) dealer in Aurora, Colo. "I will not raise your taxes nor support a tax increase. I will not do it." Yet how much faith should voters put in the Arizona Republican's proposals? Or for that matter in Senator Barack Obama's bold plans to spend hundreds of billions on national health care, infrastructure, education, and energy? Put another way, how likely is it that the plans now being spelled out on the campaign trail will actually come to pass? In two words, not very. Politics, the weak economy, and the reality of the ballooning federal budget will all limit the next President's room for maneuver. McCain's low-tax strategy could well be chewed up in a Congress that is likely to be even more Democratic than it is today. Obama's lofty plans could be undone by the hefty costs of his health-care plan and other programs. Even
some Democrats may not stomach the huge expense and vast complexity of Obama's proposals. In every election there is a big gap between what the candidates promise and what they can actually deliver. Think of Bill Clinton campaigning on middle-class tax cuts, universal health care, and infrastructure development. He spent much of his Administration cutting the deficit, not implementing big new programs. Or George W. Bush, who said he would trim greenhouse gas emissions in a move to buff his ecocredentials when facing off against Al Gore. Bush quickly abandoned that idea once the race was won. This year that gap between promise and reality may be even larger than usual. "Whoever wins will face a big wake-up call as soon as the election is over," says Daniel Clifton, head of Washington policy research for investment group Strategas Research Partners. "Many campaign promises will need to be scuttled." The 2009 economy will offer tough conditions for a President set on bold new policies. The next Administration will face anemic growth, sluggish employment, a housing downturn expected to continue at least through much of next year, and continued tight credit markets as the shakeout works its way through the financial sector. And in part because of last spring's $168 billion stimulus, the federal deficit will rise to nearly $500 billion next year, almost three times fiscal 2007 levels. There's a growing sense in Washington, particularly among Democrats, that another round of stimulus or further moves to bail out the housing or financial markets could be needed. Such spending could add tens if not hundreds of billions to the deficit. In the face of that tab, the question will be whether McCain or Obama can find the money to fund many of their tax cuts and spending proposals. Some economists think the next President will have more room to maneuver than those deficit estimates suggest. A $500 billion deficit would be about 3.6% of gross domestic product, still well below the 6% high reached in 1983. Many economists also think heavy deficit spending is the right move in a slowdown. But sustained continued deficits do still matter, especially given the looming costs of Medicare and Social Security—it's the trajectory that counts, says James Poterba, the head of the economics department at Massachusetts Institute of Technology. And "there is no question that the proposals of either candidate would dramatically worsen the fiscal situation," adds Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, a project of the New America Foundation, a think tank. Start with McCain, who believes tax cuts create growth and jobs. Along with making the Bush tax cuts permanent on income, capital gains, and dividends, he would whittle back the much disliked Alternative Minimum Tax, reduce the estate tax from its planned 2009 rate of 45% to 15%, and double deductions that can be taken for children and other dependents, from $3,500 to $7,000. He'd also trim the corporate tax rate—one of the world's highest—from 35% to 25%.
Doing anything close to that could lead to a big hole in the Federal budget, however. Because all of the Bush tax cuts are set to expire by 2011, the official budget and deficit estimates include the big rise in tax revenues that would result from rates returning to earlier levels. Those estimates also assume that the AMT is fully collected, even though Congress "temporarily" adjusts it every year to keep many middle-class taxpayers from being hit. So all the tax changes McCain calls for would be costly. According to estimates by the nonpartisan Tax Policy Center (TPC), extending most of the Bush tax cuts now set to expire in 2011 would cost an average of $170 billion a year in lost revenue between 2009 and 2018. Indexing the AMT so that it nabs fewer middle-class folk would nip $120 billion more from Uncle Sam's purse. McCain's proposed reductions in the corporate tax rate would lop off $73 billion annually on average. All told, estimates the TPC, McCain's tax proposals would reduce estimated tax revenues over the next decade by some $4.2 trillion. What does the McCain camp say? Douglas J. Holtz-Eakin, McCain's top economics policy adviser, argues that McCain's proposals should be judged against the tax policies in effect today, since no one in Washington thinks it realistic that all the Bush tax cuts will snap back. Seen in that light, the McCain plan would cut tax revenues by $600 billion over the decade. By either measure, Holtz-Eakin argues that the TPC numbers don't take account of the economic expansion that would be stoked by reducing taxes. Roberton Williams, a Congressional Budget Office veteran now at the Tax Policy Center, points out there would be a sizable shortfall in revenue if McCain got his tax cuts. Current federal spending accounts for about 20% of GDP. The TPC says McCain's proposals would cut projected tax revenues to just 17.6% of GDP. "You'd need an awful lot of growth—or some awfully large spending cuts—to close that gap," says Williams. That breach shows how tough it will be for McCain to meet his pledge to balance the federal budget by the end of his first term. He says he can cut $100 billion a year from the budget by going after earmarks and other wasteful programs in the military, in farm subsidies, and in health care. Holtz-Eakin adds that McCain would push Congress to limit government spending to a 2.4% annual increase. That's well under the 4.3% rise projected by the Congressional Budget Office, and cutting pork-barrel spending or popular government programs is one of the hardest political tasks going. Every candidate promises to cut waste. Few have ever delivered. Obama has been more specific than McCain in detailing the tax hikes and spending cuts that would allow his Administration to pay its way. His thesis is that the squeeze on working- and middle-class families lies at the core of the economy's problems. "It's time to restore balance and fairness to our economy so it works for all Americans," he told a town hall meeting in Springfield, Mo., on July 30. To address these imbalances, Obama backs $50 billion in near-term stimulus. Longerterm, he would spend $65 billion a year on a broad-based health insurance program to
cover the uninsured, plus $150 billion on green energy technologies and $60 billion on infrastructure over the next decade. Some $18 billion annually would go into early childhood education, while college students would get $4,000 in tuition tax credits. Then there's a $1,000 rebate for families hit by high energy costs. Who will pay for this largesse? For families bringing in more than $250,000, Obama would raise the top two income tax brackets back to the 36% and 39.6% rates in effect in the Clinton years. He would also boost taxes on capital gains and dividends for high earners from today's 15% to between 20% and 25%. The TPC estimates those moves could bring in an average of $28 billion a year. Obama also proposes to raise taxes on oil and gas companies, tax the gains of private equity partners as regular income rather than at the lower capital gains rate they now pay, and target overseas tax havens and income earned overseas. These moves could bring in some $92 billion a year. Still, because of host of other tax breaks he has proposed—indexing the AMT for inflation, further cuts for seniors and working families, and an extension of the Bush tax cuts for families making under $250,000—the TPC estimates Obama's plan would cut tax revenues over the next decade by some $2.8 trillion. Overall, says Williams, the Democrats' plans would bring in tax revenues of 18.3% of GDP—more than McCain's plan, but still below the estimates of expected federal spending. Like Holtz-Eakin, Obama's top economic adviser, Jason Furman, argues that Obama's plan should be measured against current tax rates, rather than having to add back the full cost of ending the Bush tax cuts. By that measure, Obama would raise $778 billion over the next decade and help whittle down the current deficit. Those numbers, however, don't take into account many of Obama's plans to boost spending in areas like health care and green energy. Furman argues that the Obama camp will also bring down spending in other ways that aren't in the TPC tally. Using more technology, better managing chronic illnesses, and reducing drug prices would drive down health-care costs for everyone and fund the expense of adding the uninsured to the rolls. Money would be freed up by redirecting much of the $10 billion a month now being spent on Iraq. Funding for green technology would come from establishing a market-based "cap and trade" system to control the harmful carbon emissions that cause global warming. Auctioning off the rights to emit such carbon to oil refiners, coal-fired power plants, and others would bring in more than the $150 billion Obama wants to pour into alternative energy development. "With each policy, we've laid out what we'll do and how we'll pay for it," says Austan Goolsbee, another top economic adviser. "Our budget adds up." It would add up—but only if all those projected new revenues come in. That's an aggressive assumption, say budget experts. Even if the decision to leave Iraq were made tomorrow, the costs of drawing down the troops and refurbishing the military's equipment will continue to eat up much of that sum for several years.
Alan Viard, a tax policy expert at the American Enterprise Institute, also points out that closing corporate loopholes is a perennially popular idea, "but it's a lot harder to do when you get down to specifics." Private equity firms already defeated one congressional attempt to boost their tax rates last year, thanks to heavy lobbying. Obtaining big savings through better management of the health-care system will also be a big challenge. "The truth is, no one really knows how much cost savings such moves can generate," says MacGuineas of New America's budget committee. Money won't be the only constraint on the candidates. Tom Gallagher, the head of Washington research for financial services firm ISI Group, argues that much will also depend on where Congress stands. That simple truth could spell big difficulties for McCain's Presidency. If current trends hold, the Democrats look likely to strengthen their majorities in both houses. Much of what McCain is now promising to voters could be very difficult to get past Congress. Take McCain's pledge to maintain all of the Bush tax cuts, even for the affluent. There is little Democratic support for maintaining today's lower rates for top-end taxpayers on income, capital gains, or dividends. "Those rates are gone for taxpayers making over $250,000 come 2011—unless Congress restores them, and Congress is simply not going to do that," says the AEI's Viard. As for McCain's plan to slash corporate rates? Viard and others say don't count on those either. Obama may not have an easy path himself. A strained budget could force him to dial back on his health-care plans or drop some of his proposed tax cuts. Obama's attempts to fund his $150 billion alternative energy plans could run into especially strong headwinds. He wants to auction off carbon emission rights to the utilities, oil refiners, and others who are largely responsible for such pollution. But auctioning those rights off rather than initially giving many of them away—as McCain and others have advocated—could put a bigger financial strain on the companies involved. A less stringent emissions plan than Obama supports has already foundered in the Senate. "A bill that's less business-friendly than the one that stalled in June would be even less viable," says Vicki Arroyo, the director of policy analysis for the Pew Center on Global Climate Change. Furman says the Obama campaign has been conservative in estimating the savings and revenues it can count on to fund its proposals. As for the politics, Obama's willingness to push for such changes and show how he'd pay for them will make the difference to Congress. "Having Presidential support will change the dynamic completely," Furman says. On that, if little else, Furman and Holtz-Eakin agree. If McCain is elected on a platform of low taxes and contained spending, he'll have a mandate the Democrats will have to heed. "Congress can't ignore the evidence," says Holtz-Eakin. Come January, the next President will have to take a much clearer stand as to where his priorities truly lie. The problem for voters is that it is impossible now to tell which of many competing goals Obama or McCain will back when the time comes to move from
campaigning to governing. In either case, Americans will likely get much less than what's being offered in the heat of the campaign.
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"
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. "It says a great deal about the state of affairs in Washington when the analysis of proposed economic policy rejects the real outcomes that can be achieved by reshaping federal bureaucracies, and protecting taxpayers' money," Holtz-Eakin says. But Jason Furman, the newly named economic policy director for the Obama campaign, disputes that view. He argues that the study demonstrates that McCain's tax plans would drive the tax code in a far more regressive direction. "Some 23% of the tax cuts they are proposing would go to households making more than $2.8 million under the McCain plan," he says. "That's a phenomenally large benefit for the super rich, beyond anything George Bush has proposed."
All Depends How You Figure It
The two candidates' tax plans would change overall government tax revenues in vastly different ways. But by how much? That depends on how the impact is measured. Under current tax law, the Bush tax cuts are supposed to expire for all taxpayers at the end of 2010, so the current estimates by the Congressional Budget Office for tax revenues beyond those years assume that rates go back to the levels in effect before the tax cuts took effect. The top income tax rate, for example, is assumed to rise from today's 35% to the old top rate of 39.6%. Using that assumption as a baseline, the Tax Policy Center looked at the impact of all the changes in tax law that each of the candidates has proposed. If McCain's proposed tax changes were put into effect, the Treasury would lose $3.7 trillion in revenue for the 10year period between 2009 and 2018, compared with what it would take in under current
law. If all of Barack Obama's tax plans were put into effect, the loss to the Treasury would be $2.7 trillion in revenues. However, no one in Washington believes all the Bush tax cuts will be rescinded. Even under a Democratic Congress and Administration, the Bush tax cuts are likely to be kept in place for most taxpayers. So economic advisers to both campaigns argue it is more realistic to judge the impact of their campaign proposals against the tax policies and rates currently in effect. Under that scenario, the numbers for both candidates look far better, although Obama still comes out well ahead. Indeed, when compared with current tax policy, his proposals would actually increase revenues coming into government coffers. Although he has promised tax cuts to many middle- and working-class families, along with the elderly, the TPC concludes that those cuts would be offset by his plans to increase taxes on highincome families and to close corporate tax loopholes. Together, those moves would bring an estimated additional $734 billion to the Treasury over 10 years, according to the Tax Policy Center study.
Leaving the Treasury Short
By contrast, even using the more favorable comparison, McCain's proposed tax changes would still leave the Treasury coming up short. According to the study, McCain's combined proposals would slash tax revenues by an estimated $253 billion over the 10year period compared with what would come in under current tax policy. Burman points out that the estimates assume the plans put forth by either candidate would be adopted exactly as proposed, which is unlikely. Both the McCain and Obama plans will probably evolve and become more specific as the campaign progresses; Congress, too, will want to have its say, no matter who is elected. There's another highly questionable factor built into these calculations: Each campaign assumes it will get hundreds of millions in new revenues by closing tax loopholes, eliminating excessive spending on earmarks, and other maneuvers. To come up with its estimates, the Tax Policy Center takes those figures at face value, though many can't be verified or are unlikely to materialize. Spending, after all, is rarely cut—or loopholes as easily closed—as much as pledged during a campaign. Instead, says Burman, the analysis provides a snapshot of what would be feasible "if they could become President without a Congress, and without the need to run for reelection." Nevertheless, he says, the estimates provide the closest idea possible of what the candidates intend. "It gives us some sense of their view," says Burman.
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