IE 11 is not supported. For an optimal experience visit our site on another browser.

Huge price tag may thwart tax cut plans

Analysis: As voters try to decode the presidential candidates' tax proposals, the recession and financial bailout are curtailing both candidates' ability to keep their multitrillion-dollar promises.
Image: John McCain, Barack Obama, Bob Schieffer
Call it the Joe the Plumber issue: Which one of these guys, Barack Obama — left, or John McCain, right —  is going to give me a bigger tax break? Ron Edmonds / AP file

When Joe the Plumber emerged to play a leading role in the last presidential debate, he unwittingly turned the spotlight on the single question most Americans want to know before they choose a president. Which one of you guys is going to give me a bigger tax break?

But as voters try to decode their tax proposals, the recession and financial bailout are curtailing the candidate's ability to keep their multitrillion-dollar promises.

For all the recent stump speeches on the tax topic, details are still tough to nail down. Both candidates’ plans are also something of a moving target, according to analysts who are trying to follow their tax proposals.

“It’s become kind of a day-to-day thing to keep track of what they’re throwing out on the stump,” said Pamela Villarreal, a senior policy analyst at the National Center For Policy Analysis, a conservative-leaning think tank. “It’s been very challenging.”

Those recent shifts on the campaign trail aside, the broad outlines of both candidates’ tax proposals are becoming a little clearer in the final stages of the campaign. A weakening economy and tightening household budgets have only heightened voter interest in the subject.

Arizona Sen. John McCain favors broad-based tax cuts — including an extension of the large tax cuts enacted early in the Bush administration. The McCain campaign, like every Republican presidential campaign since Ronald Reagan's, argues that broad tax cuts will help get the economy back on track, create more new jobs and help taxpayers at all economic levels.

Illinois Sen. Barack Obama has proposed targeting tax cuts to people at the lower end of the economic ladder, and letting tax cuts expire for individuals making more than $200,000 a year and couples making more than $250,000. The Democrat's campaign argues that tax cuts for the wealthy have failed to benefit middle- and lower-income workers, who have seen their wages stagnate since the recession of 2001.

“The two candidates essentially take the philosophy their parties have taken for years,” said Roberton Williams, co-author of a widely cited study analyzing both proposals by the centrist Tax Policy Center, an independent tax research group.

The candidates have turned up the heat in the final weeks of the campaign to highlight those philosophical differences.

At a recent rally in St. Louis, Obama told the crowd that McCain “wants to cut taxes for the same people who have already been making out like bandits — in some cases literally.”

Wealthy taxpayers would fare better under McCain’s tax plan, which would leave the top tax bracket for individuals at the current 35 percent; McCain would cut the corporate tax rate from the current 35 percent to 25 percent. Obama has said he would raise that top bracket to 39.6 percent and raise the current 33 percent bracket to 36 percent.

Obama says he will cut corporate taxes but doesn’t cite a rate. But he also says he’ll close loopholes – which would raise taxes for some corporations.

McCain also wants to double the current $3,500 per-child exemption to $7,000 by 2016.

McCain argues that Obama’s plan would “convert the IRS into a giant welfare agency, redistributing massive amounts of wealth at the direction of politicians in Washington.”

Obama’s proposals would likely create more direct payment to those on the lowest rungs of the income ladder by expanding the size and the number of tax credits that are “refundable.” Under current law, some tax credits are available only to offset taxes owed; if your credits are bigger than your tax bill, you lose the credits. Obama is proposing that more of these credits are paid in full — even if that means having the government write a check to individuals and households.

In addition to the current Earned Income Tax Credit, Obama would extend the list to include an additional credit for 6.2 percent of the first $8,100 of income; an education credit of up to $4,000 a year; a “savers” credit of 50 percent of the first $1,000 saved for retirement, and a credit for 10 percent of mortgage interest for people who don’t itemize. He also wants to eliminate taxes for seniors earning $50,000 or less.

The campaigns have squared off on the impact of their tax proposals on small businesses, including that Ohio plumber, Joe Wurzelbacher, who aspires to own a plumbing supply business.

For all the commotion surrounding his question to Obama on the campaign trail, it’s hard to know which candidate’s proposal would better suit Joe the Plumber; much depends on how his business is structured and how much income it generates. But in general, small businesses would not be hit with a tax increase under Obama’s plan, say tax analysts. Some might even benefit from Obama’s tax cuts, according to Robert McIntyre, director of Citizens for Tax Justice.

“The vast majority of small businesses make less than $250,000 a year,” he said. “They’re the ones that would benefit" under Obama’s plan.

A central question of the debate is whether the tax system should become more or less “progressive.” That is, should those with higher incomes pay a bigger share of their earnings in taxes? Despite the Bush administrations tax cuts to the wealthy, the system has been moving in that direction since 2001, according to Villarreal of the NCPA.

“The wealthy pay a greater share of the tax burden than they did in 2000, and lower-income people paid less of it than they ever had,” she said. “The bottom 50 percent now pays less than 3 percent of all federal taxes, where the top 1 percent pays almost 40 percent.”

Regardless of the philosophical differences, the two plans share one major drawback: Neither candidate has offered details on how to pay for the promised tax relief.

Even if no changes are made to the tax code, deficits over the next 10 years will add roughly $2.3 trillion to the national debt, based on projections by the Congressional Budget Office. And that was before figuring in the impact of a potentially deep recession and the costs of a $700  billion package passed by Congress to rescue the financial services industry.  

Changes proposed by Obama’s campaign advisors would mean the national debt would grow by  $5.7 trillion over 10 years, while proposals spelled out by McCain’s campaign would add $7.4 trillion, according to the Tax Policy Center. If you add up proposals made in stump speeches, the total 10-year debt increase comes to $5.4 trillion for Obama and $10.9 trillion for McCain, according to the center’s analysis.

“The biggest problem is that we can’t afford either one of them,” said McIntyre of Citizens for Tax Justice.

To close the spending gap created if all of McCain’s tax cuts were enacted, Williams, of the Tax Policy Center, estimates you would need to cut total federal spending by 25 percent. If you take entitlements like Social Security and Medicare off the table, you’d need to cut the remaining budget in half. And if you left the defense budget untouched, you’d run out of places to cut, he said.

“Basically, to believe that there are enough spending cuts that are going to happen to offset the size of the tax cuts, you’ve got to believe in the tooth fairy and Santa Claus and the Easter bunny,” said Williams.

These deficit projections don’t take into account the potential impact of a deep recession on tax receipts. Nor do they account for further spending by the government to bail out the financial system.

If McCain is elected, he will likely face strong opposition to his tax plan from a Democratically controlled Congress. If Obama is elected, he will also face opposition to cutting taxes without offsetting spending cuts; deficit hawks on both sides of the aisle already have expressed concerns about further increases in the national debt.

All of which means the tax proposals are just a starting point in what will be a long and hard-fought process once the new president is inaugurated. Neither plan will likely survive intact, no matter who is elected, according to Williams.

“I think the odds are very low,” he said.