What the Obama and McCain Plans Would Mean for Real Taxpayers
How will ordinary families be affected by the tax plans of John McCain and Barack Obama? To get some answers, I asked Greg Leiserson, TPC’s crack modeler, to develop some examples.
The results mostly track what we already know—that McCain would cut taxes somewhat for nearly all, and a lot for the very wealthy, and Obama would cut taxes substantially for low- and moderate-income families and raise them dramatically for those in the upper brackets. But there are also some surprises.
Before I look at how the tax cuts would work for some typical families, keep in mind that TPC allocates a share of any changes in corporate taxes to individuals. Thus, their tax liability not only includes what happens to their income taxes, but also to their share of corporate taxes. Economists do this since companies don’t actually pay tax, the people who own the companies do. (Workers pay some share too, but since no one can agree on how much, TPC allocates all the tax to capital).
With that out of the way, here is what the numbers look like:
A single mom, with one child, making $15,000-a-year (in adjusted gross income) would get a $17 tax cut from the McCain plan, but see a $500 reduction from Obama, thanks to his new work credit.
A newly-married young couple with no kids, making a combined income of $50,000, would get a $36 tax cut from McCain, but a tax reduction of about $1000 from Obama. The big difference again: Obama’s work credit.
By contrast, think about the classic suburban 1950s sitcom family, with two kids but only one wage earner, who makes $75,000. Ward and June Cleaver would do a bit better under McCain, who would cut their taxes by $800, while Obama would trim their taxes by only about $500. McCain’s increased dependent exemption for Wally and the Beave trumps Obama’s work credit.
Now, let’s look at a two-lawyer family, making $200,000, with one child. McCain would give them a tax cut of roughly $7000, while Obama would trim their taxes by about $5000. The big reason: each candidate would patch the Alternative Minimum Tax.
A married baseball player who takes home $2 million and has one child might want to go to bat for McCain, who would give him a tax cut of more than $30,000. Obama would raise his taxes by $135,000. Talk about getting one in the ear.
For seniors, the pattern is a bit more surprising, since Obama has been touting his tax cuts for the elderly. Obama would give an unmarried senior making $35,000 a tax cut of $3000, which would wipe out her tax bill. McCain would give her a tax cut of about $250.
But now let’s look at that her neighbor, who makes $75,000 from her Social Security, pension, and other income. Obama would actually raise her taxes by about $600, while McCain would give her a $600 tax cut.
The same thing would happen to a very poor elderly couple making just $10,000. Obama would raise their taxes by $150, while McCain would cut them by about $170.
Of course, these are all averages. Some families might benefit more and others less. But this should give you a pretty good idea of the winners and losers.
It's websites such as this that really educates. At first, I thought Obama's was the better proposition.
Garden Seat
So then it is not a tax cut but a simple tranfer payment is it not? I mean really taxes can only be cut from tax liabilities. The problem is politically motivated Economists are changing the meaning of words to fit thier ideals. A tax cut is a cut and a hand out to an individual is a transfer payment right? So basically the US government needs to further into the redistribution of wealth for political gain than it already is?
A significant feature of Obama's tax policy is to make more credits refundable so that people with low tax liability could benefit from them. The proposed refundability affects the case that you cite and means that, under Obama's plan, the single mother would receive a tax cut greater than her tax liability.
Thanks for the analysis and discussion. Much appreciated.
One item, however, bears noting. In the examples, you write: “A single mom, with one child, making $15,000-a-year (in adjusted gross income) would get a $17 tax cut from the McCain plan, but see a $500 reduction from Obama, thanks to his new work credit.”
Although this might be true in a sensitivity analysis, in reality there appears to be little-to-no difference between the two tax plans for this hypothetical taxpayer. Under the 2008 tax structure, a single mom with one child with an AGI of $15,000 has a federal income tax liability of $256 (assuming the child qualifies as a dependent and there are no deductions or credits). Therefore, the greatest difference between the two plans can only be $239 ($256-$17), not $483. If mom/child qualifies for the already-in-place child tax credit, however, then mom's federal income tax liability is zero under the 2008 tax structure, meaning there is zero difference between the two plans.
As I see it, and as your examples demonstrate, Obama's plan contains a lot of illusion (giving really big tax breaks to people who can't use them) while helping few people more than does McCain's plan — all while making high-income earners really take it in the ear (to borrow your metaphor). Is this incorrect?
Just telling your audience how different individuals and families would fare under either McCain or Obama plans is not sufficient information for this taxpayer to judge. Why not put out specific examples showing the standard deduction and exemption amounts and how you get to taxable income and compute for both regular and Alternative Minimum Tax plans. In addition, for those of us living in high tax states, many do not take the standard deduction, probably because of the excessive property tax and high state income taxes. For these people, those high itemized deductions trigger the AMT. Without getting rid of the AMT or exempting those earning less than $250,000 a year, as I believe Obama has talked about doing, most upper end middle class individuals and families will have to pay substantially higher taxes than under present law which has included a patch every year for AMT. Even those earning between $75,000 and $100,000 would get hit with AMT bills unless a patch is passed (year by year) We wait every year — last year it wasn't until the end of December that our Congress finally passed the law with the patch.
I, for one, sure hope that whoever gets elected, he will fulfill campaign promises and not backtrack on the Alternative Minimum Tax. That is a thorn in my side. Whom do you believe? Obama or McCain. Will either one do what he says he will do? That is the question!
I thought Obama was campaigning on the fact that he would eliminate taxes for all senior citizens making less than $50,000. This doesn't seem to make sense with the last scenario presented.