Obama and McCain have big economic differences

By MARTIN CRUTSINGER
AP Economics Writer
Published: September 8, 2008

WASHINGTON (AP) - Job No. 1 for the next president? In the minds of an overwhelming number of Americans, it’s fixing what ails the sick economy. What the voters will have to sort out are very different approaches offered by Barack Obama and John McCain.

Both of their fix-up plans rely heavily on tax cuts, but in sharply different ways that speak to the historic differences between Democrats and Republicans.

McCain, borrowing a page from Ronald Reagan and President Bush, would keep tax rates low for higher-income taxpayers and slash rates for corporations, arguing that this is the way to jump-start a lethargic economy and create more jobs.

Obama, focusing on a theme of many past Democratic campaigns, seeks to target his help to the squeezed middle class and address the growing income inequality between rich and poor. He would retain all of the Bush tax cuts for families making less than $250,000 a year, but would do away with Bush’s cuts for people making more than that.

The money raised from tax increases on the wealthy would be redirected by Obama to tax relief for lower-income Americans.

Unlike a lot of campaign debates where the promises of neither side get enacted into law, this war of words will make a difference because all of Bush’s tax cuts are scheduled to expire at the end of 2010.

Since neither party wants to go back to the tax rates in effect before 2001, whoever wins will have to work with Congress to pass legislation shaping how the tax code will look beyond 2010. At stake will be billions of dollars.

Under Obama, 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 an analysis done by the Tax Policy Center, because Obama would begin implementing his tax changes even before the scheduled expiration of the Bush cuts.

Under McCain, those same 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, those 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 right in the middle of the income scale, 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 analysis done by the tax center, a joint venture of the Urban Institute and the Brookings Institution, two Washington think tanks.

In addition to tax cuts, both presidential candidates are out promising voters a lot of programs in the areas of health care, energy and education.

But the outlook for the federal budget is much darker now than in 2000. In that year, candidate Bush traveled the country promoting across-the-board tax cuts as a way to fix what ailed America in the wake of a sudden slowdown in growth and a bursting of the bubble in high-tech stocks.

With the Congressional Budget Office and others forecasting record-breaking surpluses totaling $5.6 trillion over the decade, it seemed like a good idea to a lot of Washington policymakers to return a part of those surpluses in the form of a $1.35 trillion tax cut passed in 2001 and a follow-up measure in 2003.

The problem was that the surplus forecast turned out to be wildly inaccurate because of an unforeseen recession that began in 2001 just as Bush was taking office and the soaring costs of fighting a global war on terror that began in the wake of terrorist attacks on Sept. 11, 2001.

The federal books were in the black in 2001 — for the fourth consecutive year — but since then, the U.S. has returned to running huge deficits, including the largest in history in dollar terms, a $413 billion imbalance in 2004.

Now, with the government pumping out $106.7 billion to Americans in stimulus payments to keep all the problems in housing and the credit markets from pushing the country into a deep recession, the deficits are surging again.

The CBO predicts a $400 billion imbalance this year, and the administration is forecasting that the deficit for the next budget year that begins Oct. 1 will hit an all-time high of $482 billion.

That forecast doesn’t include the cost of the government takeover announced by the administration on Sunday of mortgage giants Fannie Mae and Freddie Mac. That effort, which has the potential of adding tens of billions of dollars to the deficits in the short run, won the qualified backing of both Obama and McCain.

The CBO’s current forecast for the next decade doesn’t look that bad on paper, projecting the budget will go into the black in 2012, giving the country a small surplus of $270 billion over the next 10 years.

However, that forecast comes with a warning label. The CBO has to make its estimates based on current law, which has the Bush tax cuts expiring after 2010 and makes no provisions for further outlays to keep the Alternative Minimum Tax on the wealthy from hitting millions of middle-income taxpayers, a huge expense every year.

The economic plans that McCain and Obama have put forward do include the billions needed to deal with the AMT plus extending the Bush tax cuts. McCain would extend all of them except the total elimination of the estate tax, while Obama would extend only the cuts for individual taxpayers making less than $200,000 annually or couples making less than $250,000.

With those big-ticket tax cuts plus the impact of other changes in the tax code included, McCain’s plans would slash revenues by $4.2 trillion over the next decade while Obama’s reduction would be a slightly smaller $2.9 trillion. Both would transform the CBO’s small surplus over the 10-year period into big deficits, according to the tax center.

The two campaigns argue that it is not fair to hold them to the unrealistic CBO baseline. Rather, the campaigns like to compare their proposals to a current policy baseline which assumes the Bush tax cuts are extended and the AMT is patched every year. Under that baseline, according to the tax center, McCain’s plan would cut taxes by $596 billion over the next decade; Obama’s would increase taxes by $627 billion during the same period, reflecting the fact that Obama is raising tax rates on the wealthy and boosting the taxes they pay on dividends and capital-gains earnings. Obama is also not embracing McCain’s proposal to cut the top rate on corporate taxes.

Regardless of the baseline used, the government’s debt would go up sharply — by $3.5 trillion under the Obama plan and by $5 trillion over the next decade under McCain’s plan, the tax center estimates.

While both campaigns argue they are not getting enough credit for their plans to cut spending, history shows that campaigns always pledge to pay for their tax cuts but seldom achieve that goal because spending cuts prove much more difficult to get through Congress.

And how about the overall goals — McCain’s effort to give the country a boost by cutting taxes on the wealthy and corporations and Obama’s efforts to narrow income inequality?

Economists say there are things to like in both programs. They generally favor reductions in top rates as a way to spur new investment and job creation, so on that point McCain’s program gets good marks. However, there are worries that the higher deficits that are expected because of the tax cuts could drive up interest rates, raising the cost of money for businesses and result in less investment, not more.

For Obama, the concern is that all of his new and expanded tax credits, such as his “Making Work Pay” refundable credit which would provide low-income workers with a maximum of $500 per individual and $1,000 per family, will further complicate an already complex tax system and won’t make a very big dent in the problems of income inequality.

And neither candidate is talking very much about tackling what all experts see as the biggest budgetary challenge facing the next president — the explosion in the government’s big benefit programs for Social Security and Medicare as the baby boomers retire.

Obama has proposed levying a 2 percent to 4 percent tax on payroll earnings above $250,000 a decade from now to deal with Social Security, but experts say that would fix only a small part of the problem with the pension program. And neither campaign has put forward any proposals that experts say would make a meaningful dent in fixing Medicare, the far bigger entitlement problem because of soaring health care costs.

Some experts see tax increases, not cuts, in the country’s future regardless of who wins the presidency.

“We are starting out with very big deficits, and the demographics are turning more unfavorable with all the baby boomer retirements,“ said Nigel Gault, senior economist at Global Insight, a Lexington, Mass., forecasting firm. “The deeper you get into the next presidency, the more likelihood that taxes will have to be raised.“

AP Business Writers Ellen Simon in New York and Christopher Rugaber in Washington contributed to this report.