As I’ve noted before Sen. Obama’s remarks about people who live in small towns don’t interest me much but the merits of the case and what he or Sens. Clinton or McCain plan to do about it do. Today I’ll begin a little series in which I’ll consider the several candidates’ plans for the economy.
Contrary to the conventions of good story-telling I’ll begin neither at the beginning nor in medias res, in the middle of the action, but at the end with my conclusions. I don’t think any of the candidates have the foggiest notion of the nature of the U. S. economy nor the steps that will help it grow.
All of the information in these posts will be taken from the candidates’ official campaign web sites. The relevant section of Sen. Clinton’s web site is here. Unfortunately, Sen. Clinton’s web site is not organized in such a way that her plans for the economy are collected in one place—they’re spread throughout the “Issues” section. The relevant section of Sen. McCain’s web site is here. The relevant section of Sen. Obama’s web site is here.
In this segment I’ll take a look at the candidates’ proposals on taxes.
All three of the candidates are proposing what each refer to as “middle class tax cuts” but it’s apparent that they mean different things by the phrase. Sen. McCain proposes eliminating the Alternative Minimum Tax. The AMT is, basically, a flat tax of 28% on incomes over a certain level. When it was enacted in 1969 the AMT fell on just 155 families, the intent of the bill being to prevent the very richest Americans from paying no taxes at all. Due to flaws in the structure of the tax increasing numbers of taxpayers have fallen within its scope and millions of taxpayers now pay the AMT. Nearly 20% of all taxpayers may now face paying it.
I think there’s a great case for a major permanent restructuring of the AMT but a somewhat less great one for eliminating it altogether.
Most of the people paying the AMT make between $150,000 and $415,000. Depending on where in the country you live that might make you rich, upper middle class, or middle class. So, for example, in Fairfax County, Virginia, where a lot of nicely compensated federal government workers live, or, say, San Jose, California (Silicon Valley) prices are high and people who barely make it into the middle class are subject to the AMT. Here in Chicago most of the people who pay the AMT are upper middle class (the top quintile of income earners) or rich (the top .1% of income earners). Viewed from a national standpoint characterizing abolishing the AMT as a “middle class tax cut” is a bit of a stretch however much it might look that way to a U. S. senator.
Here are Sen. Clinton’s plans for middle class tax relief:
Lower taxes for middle class families by: extending the middle class tax cuts including child tax credit and marriage penalty relief, offering new tax cuts for healthcare, college and retirement, and expanding the EITC and the child care tax credit.
The Earned Income Tax Credit can be thought of as an income supplement, sort of a reverse income tax. There are limits on both total income and investment income in order to receive the EITC, investment incomes over $2,900 disqualifying one for the credit. Very few in the middle class are eligible for the EITC these days and practically all who are are in the second income quintile, the lower middle class. Expanding the EITC to include any significant number of middle class families would take one whopping reform.
Frankly, in the absence of substantial increases elsewhere in her plans all of these proposals strike me as fiscally pretty irresponsible. Add to that the experience over the last 25 years that cutting taxes is easy, raising them very hard indeed and I seriously doubt that Sen. Clinton will be able to achieve both her plans to grant sweeping tax relief to middle class families and her plans for a balanced budget.
Here are Sen. Obama’s plans for middle class tax relief:
Obama will cut income taxes by $1,000 for working families to offset the payroll tax they pay.
* Provide a Tax Cut for Working Families: Obama will restore fairness to the tax code and provide 150 million workers the tax relief they need. Obama will create a new “Making Work Pay” tax credit of up to $500 per person, or $1,000 per working family. The “Making Work Pay” tax credit will completely eliminate income taxes for 10 million Americans.
* Simplify Tax Filings for Middle Class Americans: Obama will dramatically simplify tax filings so that millions of Americans will be able to do their taxes in less than five minutes. Obama will ensure that the IRS uses the information it already gets from banks and employers to give taxpayers the option of pre-filled tax forms to verify, sign and return. Experts estimate that the Obama proposal will save Americans up to 200 million total hours of work and aggravation and up to $2 billion in tax preparer fees.
He also supports an increase in the EITC.
Sen. Obama’s proposals have some of the problems that Sen. Clinton’s do, i.e. in the present political climate they’re likely to be fiscally ruinous. Is removing large numbers of people from the tax rolls a good thing or a bad thing? I’m inclined to believe that everybody who earns an income in the United States ought to pay some taxes here. By my calculation the income offset proposal will mean that anyone making an income of about $13,500 will pay no taxes other than sales taxes. In effect they will be subject neither to the income tax nor FICA. While I think that aiding people in need is good and proper (and an appropriate role of government), I’m concerned about the incentives being built into the proposed system. Arguments, anyone?
John McCain plans to make the “Bush tax cuts” permanent. Sens. Clinton and Obama plan to allow them to expire. Whether that’s prudent depends on the economic situation in 2011 but fiscal sanity requires that we’re either going to have to cut spending or raise taxes and probably both. I’m a little concerned that Sens. Obama and Clinton propose spending the revenues realized as a result multiple times over. I also think that the reality that we’re going to have to face is that raising taxes on the top two income quintiles (which is where the money is) will also wring a lot of the private investment out of the system since those are the people doing most of the investing. I’d like to see the arguments that in general removing $1 from private investment and moving it to public spending is a pro-growth policy although I don’t completely reject the possibility under very stringent conditions.
Sen. McCain proposes requiring a 3/5 plurality in Congress to raise taxes. That’s already de facto the case and would require a constitutional amendment to impose. It’ll never happen. He also proposes cutting corporate tax rates to 25%, reducing taxes on dividends and capital gains, first year expensing of equipment and technology investments by companies, a ban on Internet taxes, freezing cell phone taxes, a permanent tax credit on wages spent on R&D, and reduced Medicare premiums. IMO first year expensing should have been the tax cut back in 2001 rather than the “Bush tax cuts”. IIRC we’re the only OECD country that doesn’t currently have that provision. I’m skeptical he’ll be able to get any of these passed and, without spending cuts (which I’ll acknowledge he also proposes) fiscally unsound.
Bang up job, I say. But your summary leaves me pretty ambivalent about which candidate I would support. I don’t think any of these plans survive first contact with Congress.
I don’t have any problem with the poor not paying income taxes. The poor pay a disproportionate amount of their income on state and local taxes, particularly sales tax, which are regressive. (I would argue that the Illinois income tax is regressive in effect) One of the important goals of the federal income tax is to provide “progressivity” to offset “regressivity.”
Though I’m not a fan of the EITC — I see it as a subsidy for the fast food industry, but if Democrats want to expand it, they should find ways to help the poor collect it since a lot of them don’t file the paperwork.
Thinking it though more… Since I think the odds strongly favor the return of a Democratic Congress; does that make the problems with McCain’s plans less so or more so? I would guess, less so.
I’m curious- is there, in your opinion, a plan that could be both fiscally sound and politically possible? It doesn’t seem that there is, to me.
At this point I’m planning to address that in my conclusion. Certainly none of the candidates’ plans meet those criteria. I think that a Democratic president might be able to push through some modest incentives to investment if he or she were inclined to do so. I see no signs that would be the case.
I think that the prevailing paradigm of growth through consumer spending is problematic.
I’m curious about your thoughts on economic growth vis-a-vis your statement that I don’t think any of the candidates have the foggiest notion of the nature of the U. S. economy nor the steps that will help it grow. I concur as to the fog, but am interested in your thoughts for economic expansion.
I think that a real focus on simplification of the system is the right way to go. McCain made some mention of this with his idea that we have a choice as individual tax-payers of filing under the current system or filing under a flat tax system. It sounded like a mess to me, but interesting.
The thing I wanted to say is that I really think some of Obama’s proposals, like the idea of pre-filled tax returns, are pretty innovative and really would help to improve the system, certainly in the long term. Why doesn’t the pre-filled tax form idea catch on? It doesn’t seem to be getting much press.
If I understand the facts regarding recent history: Bush cut taxs rates, and although the mantra of the Democrats that echoed through the media for two years was that record deficits were the result, when looking at CBO numbers, the deficit as a percentage of GDP never reached 5%. 6% of GDP deficits occurred under Reagan, Bush 1, and Clinton. What does this mean? The nominal deficit was a record, but as a percentage of our economy the deficit was not a record….because the economy grew so much. As a matter of fact, the growth in the US encomy between 2003-4 and 2007 was greater than the size of the entire Chinese Economy. A pretty stunning argument for tax cutting. All this growth had an amazing offshoot…tax revenues collected in 1999 were 1.8 trillion dollars, by 2007 tax revenues collected were 2.6 trillion dollars.
Off course, in that same period of time, the republican congress spent 900 billion dollars….a 100 billion dollars more than the increased revenues.
So where does this leave us? In not a good place, neither political party has any real interest in spending cuts/controls. Greenspan always pointed out the neccessity for cutting spending and while often cited for his views, never seemingly for that point.
I do question the need for any tax increases. Revenues collected are not the issue. The constant growth of the extent and reach of federal regulation is the problem.