Even with the $700 billion bailout, the financial crisis and fragile economy promise to loom large over the opening days of the next administration.
Dealing with the housing and credit problems that President Bush says will take “some time” to clean up could threaten the economic policies advanced by Democratic Barack Obama and Republican John McCain.
Obama acknowledges “the next president will have to scale back his agenda and some of his proposals.” Yet neither camp is eager to say precisely what changes might have to be made — promises broken or delayed.
Obama’s running mate, Sen. Joe Biden, was questioned about that in Thursday’s vice presidential debate. He could list only a few: cutting wasteful spending and “we might have to slow down a commitment we made to double foreign assistance.”
His GOP counterpart, Sarah Palin, was asked if there was any campaign promise she would have to take off the table because of the financial crisis. “There is not,” she said.
Newly elected presidents have a good track record in winning approval of major tax bills and other legislation in their first year in office.
The next president probably will lay out an ambitious agenda, possibly soon after the election and amid great constraints: the financial crisis and a rising budget deficit projected by the Congressional Budget Office to reach a record $438 billion next year — and that’s before figuring in the bailout’s first-year cost.
Central to the nominees’ tax proposals is that an array of Bush tax cuts are due to expire in 2010.
McCain would keep tax rates low for everybody, including higher-income people. For companies, he would slash them from the current 35 percent to 25 percent, arguing it is the best way to jolt the economy and create jobs.
Obama, who says his program would most help the squeezed middle class, would retain Bush tax cuts for families making less than $250,000 a year and individuals making less than $200,000. He would do away with them for people above those levels.
The Illinois senator also has proposed raising the top marginal income-tax rate, now 35 percent, to 39.6 percent, and raising the current 33 percent rate to 36 percent. The money raised from tax increases on the wealthy would be redirected by Obama to tax relief for lower-income people.
McCain has proposed increasing the dependent exemption, but not the personal exemption for the taxpayer and spouse, from $3,500 now to $7,000 by 2016.
Both have proposed making marriage penalty relief permanent.
Under Obama’s approach, the wealthiest 1 percent of taxpayers, those making roughly $600,000 or more, would see their taxes go up on average by $93,709 in 2009, according to the nonpartisan Tax Policy Center, because Obama would begin putting in place the changes before the scheduled expiration of the Bush cuts.
For McCain, those same wealthy taxpayers would see an average reduction of $48,860, reflecting in part additional cuts he is proposing.
By contrast, the bottom 20 percent of taxpayers, with taxable income of roughly $19,000 per year or less, would see their taxes cut by an average of $567 under Obama’s program and $21 under McCain’s plan, the tax center estimates.
For the 20 percent of taxpayers in the middle, making roughly between $37,600 and $66,400, the tax break would be $1,118 under the Obama plan and $325 under the McCain plan in 2009, according to the center’s analysis.
Obama would raise the top rate on capital gains and dividend income, now 15 percent, to 20 percent for families making over $250,000. McCain would keep both at 15 percent.
Obama has proposed excluding people age 65 and older from federal income tax liability if they earn $50,000 or less, along with creating a new tax credit of up to $1,000 for lower- and middle-income families ($500 for individuals) to offset federal payroll taxes.
McCain wants a 15 percent federal estate tax rate and a $5 million exemption. Obama has suggested a 45 percent federal estate tax rate and a $3.5 million exemption amount.
Obama offers expanded renewable energy and conservation tax incentives and a repeal of tax incentives for oil and gas companies. He supports energy rebates for individuals to help offset the home-heating costs.
McCain has proposed an end to ethanol subsidies and discussed a federal gas tax holiday.
Both campaigns recognize the importance of moving quickly in the beginning of a new presidency.
“I think it will be challenging to deal with the urgencies of the financial crisis and the winding down of the Iraq war, while also moving forward with major long-term agenda items like health care and climate change,” said Gene Sperling, a former top economic adviser to President Clinton who is now helping Obama.
“I think that the cost of doing nothing on health care and climate change is so high that there is no case for putting off long-term action because you’re in a short-term financial crisis,” Sperling said.
Douglas Holtz-Eakin, a top McCain economic adviser, said McCain is standing by his tax-cut proposals for now.
“Historically, we never have sustained successful deficit reduction without strong economic growth. So he’s put that first,” Holtz-Eakin said. Furthermore, “John McCain is running on a platform that does not include massive increases in spending,” he said.
McCain also has indicated he is considering putting a complete cap and freeze on discretionary, nonmilitary and nonveterans’ spending.
Of course, economic policy will be set not just by the new president but by the new Congress. Congress is in Democratic hands now, and Democrats are expected to increase their numbers in the November elections.
That could make it hard, if McCain is elected, for him to get his tax-cut proposals enacted.
“The reality of it is taxes will probably rise” no matter who is elected, said Mark Zandi, chief economist for Moody’s Economy.com and an occasional McCain adviser. “It makes it a lot more difficult to cut taxes when you have big budget deficits.”
Zandi thinks that the early days of the next presidency will be dominated by a lingering financial crisis and the need for “more government intervention, more legislation directly supporting housing and mortgage markets” beyond the $700 billion bailout.
On health care, Obama would have mandatory coverage for children, but no mandate for adults. He would aim for universal coverage by requiring employers to share costs of insuring workers and by offering coverage similar to that in plan for federal employees. He says the approach would cost up to $65 billion a year after unspecified savings from making the system more efficient.
McCain would have no mandate for universal coverage. He has proposed taxing for the first time employer-provided health benefits. But he also has proposed an offsetting refundable tax credit of $5,000 for families and $2,500 for individuals designed to make health insurance more affordable.
On global warming, Obama has proposed a 10-year, $150 billion program to produce “climate friendly” energy supplies. He would pay for it with a carbon auction requiring businesses to bid competitively for the right to pollute and aimed at cutting greenhouse gas emissions 80 percent by 2050.
McCain broke with Bush and led a Senate effort to cap greenhouse gas emissions. He favors a plan that would see greenhouse gas emissions fall by 66 percent by 2050.
Both Obama and McCain sponsored earlier legislation that would set mandatory caps on greenhouse gas emissions and increase federal fuel economy requirements beyond 35 miles per gallon.