The Tax Policy Center, a joint effort by the Brookings Institute and the Urban Institute, has looked at both candidates tax proposals and…well it isn’t pretty. Basically both candidates do not believe in fiscal responsibility, both are pandering, and neither of them are willing to make the hard decisions. Which is somewhat to be expected given that the voters don’t want candidates that put forward a sound fiscal policy (anyone who claims otherwise is a lying partisan hack).
McCain’s plan is to make permanent the tax cuts of 2001 and 2003, extend the AMT Patch, increase the number of dependent exemptions, and lower corporate taxes and the estate tax with a few other changes as well. The overall impact from 2009 to 2013 would be to add about $1.5 trillion to the deficit and $4.2 trillion from 2009-2018. This is not good in that current deficits must eventually be paid. If the deficit is paid for via tax increases then this additional increase in the deficit would mean higher future tax rates. Add in the revenue shortfalls for Social Security and Medicare and taxes will have to increase to very high levels. Alternatively the deficit could be addressed by drastic cuts in spending, but then things like Medicare, spending on infrastructure and defense would have to be drastically reduced. Not exactly all that great sounding either. Basically this proposal is an irresponsible proposal.
Obama’s plan is much more complicated in that it makes more use of phase-ins to limit the revenue losses of various “wonderful” programs that Obama is offering. The report notes that the impact of these phase-ins has the effect of raising the marginal tax rates for households which can have a deleterious impact on work effort which in turn could adversely impact household income and economic growth.
Obama also relies on what can be described as focused pandering to various voting constituencies such as the elderly. Obama proposes to eliminate the tax burden for all person’s 65 and older who make $50,000 or less. What is wrong with this? Well if you make just over $50,000 then you will face a dramatically higher marginal tax rate which again could have an adverse impact on the decision to work and how much to work. Further, this violates the notion of vertical equity in that two people each earning $45,000/year would be treated differently even though income wise they are identical. In one case one person is say 28 and the other is 68. In short, Obama’s focused pandering to the elderly would discriminate on age.
Also consider that we are looking at a future where government expenditures on the elderly are scheduled to rise dramatically and yet Obama proposes to cut their taxes even further (most elderly already pay little or no federal taxes). This is a rather unseemly attempt to ensure that the elderly vote for him. Change we can believe in, more like pandering we can believe in.
Obama’s plan will also add to the deficit as well, but not as much as McCain’s. From 2009 to 2013 Obama’s plan would add $900 billion and from 2009 to 2018 it would add $2.8 trillion to the deficit. It is fair to say that neither candidate has any inclination towards fiscal responsibility…unless these plans are basically lies and that once in office the candidates will actually turn around 180 degrees and act responsibly. I wont be holding my breath though.
Both candidates appear to be disconnected from reality when it comes to their respective tax plans. Each plan would add to the deficit, would not address the issue of complexity of the tax code or would increase it, and each plan is an attempt to pander to the voters. In reading about these plans it reinforces my views of politicians, whenever talking lie, lie, and lie again. Yes we can have lower taxes, balance the budget and give everyone a pony too.
UPDATE (Dave Schuler)
I’ve corrected a typographical error which reported the deficit 2009-2018 under the Obama plan as $2.8 billion rather than the correct $2.8 trillion figure.
