Introduction
The ongoing presidential campaign has kicked up a lot of heat and dust vis-à-vis the nation’s pressing economic issues. This has become more pronounced given the current crisis arising out of the bursting of the sub-prime bubble. This paper examines the position of the two leading contenders Barack Obama and John McCain, with respect to the taxation aspect of the economic policy. The tax proposals of both the candidates have come under scrutiny as they have each announced tax reform to a substantial degree. As expected, the candidates have divergent positions on economic issues in line with the traditional stand of their parties. While McCain favors tax breaks for the rich, Obama has famously gone of record that one can show one’s patriotism by accepting higher taxes. The debate on the economy is having an effect on the presidential campaign and is bound to influence the outcome of the election.
The paper is divided into three sections. The first two sections deal with the positions of McCain and Obama on the issue of taxes and a look at the merits and demerits of the same. These sections list the policy proposals in detail. The third section deals with the potential consequences of each on the American economy in the context of the current scenario of the financial meltdown.
John McCain
John McCain’s tax proposals are heavily skewed in favor of the rich. According to estimates, his tax proposals would add more than $5 Trillion to the federal budget. This is because he favors raising the income limit for the tax breaks. He is reported to have said that he would consider people who earn over $5 Million a year as “rich,” and thus, the tax breaks would be available to anyone who earns below this. Though this statement was later reported to have been a “causal remark” by the McCain camp, nonetheless, it underscores the candidate’s position on favoring tax breaks for the rich. This is something that the US cannot afford at this point in time. Another feature of the McCain proposal is to make the tax cuts of the Bush administration in 2001 and 2003 permanent. This is something that has come in for criticism as well. The other notable points include lowering the rate of corporate tax from 34% and 35% to 25%. This proposal seeks to encourage the corporations who already enjoy substantial rewards to get even further benefit. McCain’s tax plans would essentially aid wealthy taxpayers and continue the Bush administration’s tilt towards the rich. Thus, McCain has been derisively called “McSame” by critics who point to the continuity of policies rather than offering something new. But, this is in tune with the Republican Party’s stance historically that favors big business and the rich. The one point in favor of McCain’s proposals is that a sudden increase in the tax rate for the upper segment used to tax breaks for the last eight years would result in a slump in savings and productivity.
In the current climate of gloom and uncertainty following the financial meltdown, McCain’s tax proposals are increasingly finding few takers among vast sections of the electorate. He is perceived as being helpful to the very people who got the country into an economic mess. This is by implication to Wall Street and the hedge fund managers who resorted to “Casino Capitalism.” Thus, McCain’s proposals may be harmful to the country in the present state of crisis. This is particularly so as his proposals if implemented, would increase the deficit in the federal budget that is already swollen due to the bailout of Wall Street institutions in the wake of the financial crisis.
Barack Obama
Barack Obama’s assertion about paying taxes as a sign of patriotism has raised the hackles of Republicans. However, his pledge that all families making less than $250,000 a year would not see their taxes go up has gone down very well with his support base. Obama’s tax proposals include subsidies for health care that would benefit the middle and lower-income ranges of the population. He also proposes the maximum rate of corporate taxes is around 35% which would be a sop to Wall Street – fearing a further increase- but substantially higher than McCain’s proposed rate. Obama also proposes to raise the dividend rate from 15% to 25%. Where Obama scores are the fact that he has provided substantial incentives for families to save, his proposals to improve citizen’s contributions to their 401(k) plans are a good move in the direction of providing retirement nest eggs for working-class professionals. Both the measures outlined above would ensure that the shopped out and saving less US consumer regains some of the balance in their savings rate and lead to an overall rebound in the economy as a result of the current downturn. Obama’s incentives to exempt senior citizens who earn less than $50,000 a year from paying income tax is also a step in the right direction. It is acknowledged that the current crisis in the pension system for the retired needs bold measures, and Obama certainly has moved in that direction.
Obama’s plan to refund child care and dependant tax credits would go a long way in helping low-income families to sustain their kids who may want to attend school. This would also increase the after-tax income of this segment which would have ripple effects on the structure of the economy and the role of middle and low-income families.
Obama’s tax policies are good for the American economy over the longer term. It is estimated that over a ten-year time frame, his policies would result in a larger accretion of revenues than the plan of his opponent’s. Obama’s plan would ensure that the cut in tax revenues would be around $2.7 Trillion, whereas McCain’s plan, including the hidden costs, would amount to $ 4 Trillion. This is something that the economy can ill afford in these times.
The contrast between the candidates
The current economic depression in the US has made both the candidates think on the issue of how to resolve the crisis. They presented a bi-partisan picture when they voted for the bailout. One of the key arguments of John McCain about Obama’s plans hurting small businesses is that Obama calls for cutting taxes for 95 percent of the American population. McCain rubbishes this with the fact that when 40 percent do not pay any taxes at all, the only way out is to tax the hard-working small businessmen like Joe the Plumber. In other words, when you cannot raise money by taxing those who do not pay any taxes, you have to necessarily tax those who are paying, and this leaves the entrepreneurs and small businesses wondering whether their work was in vain. John McCain’s plan, on the other hand, is to give tax cuts to the businesses so that they can use the accrued income to create more jobs and help the economy in general grow. Thus we come to the heart of the divide between the presidential candidates on ways to improve the economy and get America out of the recession. The crux of the matter is about whether one should tax more or tax less. With time running out for the government to find sources of funding for its programs, there might not be any real alternative but to increase taxes. Given the unsustainability of the federal deficit over large periods of time, the excesses of the Bush administration may have to be reversed, and Obama’s measures might very well be the answer. And as several experts have pointed out, if a Democratic Congress becomes a reality in Nov ’08, even with a McCain presidency, there would be little scope for him to continue with his tax proposals.
Conclusion
This paper’s conclusion is that Obama’s views on taxes, though not radical or particularly new, may very well prevail. Given the data that we analyzed, Obama’s proposals are just, whereas though not harmful, McCain’s tax measures would certainly not be beneficial.
Footnote: Joe the Plumber
John McCain’s use of “Joe the Plumber” was a telling point on the state of the economy and the candidate’s position on taxes. While Obama has called for more taxes so that he can “spread the wealth around,” John McCain instead wants to cut taxes and ensure that governmental support for his programs continues. John McCain has made the “small businessmen” like Joe the Plumber the heart of his economic policies and repeatedly warns that the health care and other programs of Obama may well be the end of Joe the Plumber. It has to be seen whether Joe the plumber gets a new lease of life for his business or is out of business.
Reference
“A Preliminary Analysis of the 2008 Presidential Candidates Tax Plans“. The Brookings Institution. Web.
Farrell, Christopher. “McCain and Obama on Tax Reform”. The Businessweek Website. 2008. Web.
Braun, Stephen. “McCain and Obama tax plans diverge on wealth”. The Los Angles Times Website. 2008. Web.