The Candidates’ Tax Plans: Fuzzy Math

Monday, Jul. 28, 2008

Clarification Appended: July 28, 2008

Almost by definition, candidate sound bites are meant to obscure as much as they reveal. And nowhere is that more apparent than when politicians talk about their economic policies. Take this one, for instance: “The choice in this election is stark and simple,” John McCain said at recent Denver event, repeating a phrase that is a staple of his stump speech. “Senator Obama will raise your taxes. I won’t.”

Seems clear enough, right? You already know the old argument: Republicans cut taxes, Democrats raise them. Except it’s not true, at least not in the way that it seems. But don’t take my word for it. Here is Douglas Holtz-Eakin, McCain’s chief economic policy adviser. “I used to say that Barack Obama raises taxes and John McCain cuts them, and I was convinced,” he told me in a phone interview this week. “I stand corrected [about Obama’s plans].”

That’s because unlike sound bites, the policies proposed by Obama are actually complicated. He would raise taxes on those who make more than about $200,000, in some cases by significant amounts, through increases in taxes on capital gains, dividends and regular income. But Obama has also proposed a whole range of tax cuts, for poor seniors, working people, homeowners and parents, as well as for health-care expenses and even renewable energy. The net effect, according to experts in both campaigns and independent analysts, would be a reduction in government revenue over 10 years. In other words, a tax cut.

But don’t expect McCain to change his rhetoric on the stump. That’s not how this game is played. On Wednesday, the Obama campaign put out a press release claiming that McCain’s economic plan was “$2.8 trillion more expensive than his advisers previously admitted.” These were ominous words, playing into the old story line about Republicans using budget gimmickry. But the statement was largely based on an interpretation of a tax plan — for an optional alternative income-tax system, with a flat rate — that McCain has never described in detail, let alone with enough specificity to gauge. And it uses a budgetary scoring system that the Obama campaign rejects in calculations of its own proposals.

Still, the Obama campaign plans to keep repeating the charge, and they have their reasons. The people who run campaigns know you only have so much time to think about this stuff, so they want to make it easy for you. They translate complex economic projections into aphorisms. They turn tax plans that must be read with lawyers’ help into sentences a third-grader can understand. The details? Bah. That’s politically foolish, even if voters claim that’s what they really want to hear about.

“They are better off speaking in sound bites and generalities,” says Bob Williams of the Tax Policy Center, who recently did the unthinkable with some colleagues: he tried to figure out what the two candidates’ tax plans would actually mean. It wasn’t easy. “One challenge facing anyone who wants to estimate the effects of candidates’ tax plans is that no one — not even inside the campaigns — knows exactly what the proposals are,” reads an early conclusion of the resulting report. “In a sense, we have done them some harm here by saying we want to pin you down on what you mean,” Williams explains.

It’s not that the candidates don’t want to talk about the economy or the federal budget. In recent weeks, they’ve been doing a lot of that. But they speak in words that don’t really mean much. “I will reform our tax code so that it’s simple, fair, and advances opportunity,” said Obama at a rally in Raleigh, N.C. “American workers and families pay their bills and balance their budgets, and I will demand the same of the government,” declared McCain at a speech in Denver.

It takes some serious work to figure out what they are actually getting at. Neither candidate has laid out an actual plan, with specific numbers, to bring America’s fiscal house into order. They do, however, offer plans that differ strikingly from each other. McCain’s tax plan benefits mostly those in higher income brackets, while Obama’s plan benefits mostly those in lower- and middle-income tax brackets. McCain wants a tax cut for corporate profits, while Obama has proposed a whole host of tax cuts that will benefit those in the middle-income brackets. Both candidates have new spending programs, though Obama appears to have more. And both candidates say they will cut spending elsewhere, though they fail to provide many specifics about how.

So what is a concerned voter to do? One good way to measure the fiscal responsibility of a candidate’s plan is to compare the total amount of government revenue from taxes they plan to raise against the gross domestic product, which is the sum total of the nation’s economic activity. According to congressional accountants, the Federal Government spent about 20% of the GDP in 2007, while taking in 18.8% of the GDP in taxes. The difference between spending and tax receipts — about $162 billion — was the budget deficit.

According to the Tax Policy Center, neither Obama nor McCain has laid out plans to close the budget deficit over the next 10 years under current spending regimes. Not counting health proposals, the McCain plan would collect about 17.9% of GDP through taxes. The Obama plan would collect about 18.4%. For comparison, congressional accountants predict that, under current law, the Federal Government is projected to spend about 19.7% of GDP in the same time period, meaning both McCain and Obama would run deficits — 1.8% and 1.3% of GDP, respectively — without significant cuts in federal spending or surprising growth in the economy.

In general, Obama has proposed more new spending programs than McCain, but even here the details get tricky. McCain, for example, has a new risk pool, which would help provide health insurance to those with pre-existing conditions, and he wants to continue to grow the size of the Army and Marines. Obama has a big new green-energy fund, a plan for national service and the promise of more money for education. The green-energy fund would be paid for, Obama says, by selling energy producers permits for producing greenhouse gases.

Where will the candidates cut spending to prevent the deficit from exploding? On this point, both candidates are relying, as usual, on sound bites rather than actual policies. Obama says he wants all sorts of cuts to waste and abuse, including procurement reforms and a reduction in earmarks, but he doesn’t estimate the exact savings of these measures. He does, however, acknowledge that he wouldn’t end deficit spending in his first term.

For McCain, who has a bigger hole to fill because he will collect less taxes, the spending issue is one he says he would tackle with gusto once in office. But the details of those spending cuts are mostly, once again, in the sound-bite stage. McCain has promised “comprehensive spending controls,” “across-the-board scrutiny” and a bipartisan congressional commission to chop up spending. The goal, says Holtz-Eakin, is to return to the fiscal discipline of the late 1990s, when then President Bill Clinton struck a deal with a Republican Congress to limit spending increases. “People write [new spending] initiatives like they get out of bed these days,” says the adviser.

Few independent analysts think that McCain has much hope in reaching his goal of a balanced budget by 2013, but then they are just working off sound bites, not actual numbers. The McCain campaign’s hypothetical spending cuts would only be achievable, they say, by a President who did not have to negotiate with a historically big-spending Congress. “King McCain might be able to do it,” says Len Burman, another author of the Tax Policy Center report. “But President McCain will have a very difficult time.”

And so we return to where we began, a war of words with few numbers to back them up. The candidates speak in platitudes and broad swipes. They claim the high road, while banishing their opponents to the low road. And the American voters, if they are interested, must sort through the literature seeking numbers that were never really meant to add up. “In the real world, this gives you a sense of what the candidates would want to do,” says Williams, of the analysis of the candidates’ tax plans, “but not really a sense of what would happen if they were elected.”

The only way to find that out may be to put them in office.

The original version of this story contained a quote by John McCain’s economics adviser, Douglas Holtz-Eakin, that some have misinterpreted as suggesting that McCain is not really a tax cutter. The quote has been amended to make clear that when Holtz-Eakin said “I stand corrected,” he was referring to his previous statements that Obama raises taxes, not that McCain cuts them.

Original Post >>>HERE<<<

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