McCain and Obama Stimulus Plans: The Good, Bad, and Ugly
Both Barack Obama and John McCain have rolled out new economic stimulus plans. Each is a hodgepodge of some good ideas, some not-so-good, and some potentially awful. Obama says his new ideas would cost $60 billion. McCain says his would cost about $52 billion.
Here is a quick look at what they have in mind:
The centerpiece of Obama’s proposal is a new refundable tax credit for companies that add domestic jobs. Businesses would get $3000 for every net new full-time worker they hire. Any business would be eligible, even those that pay no taxes.
Obama would offer this credit for two years—2009 and 2010. In effect, it would pick up an employer’s share of Social Security and Medicare payroll taxes for a median wage worker.
On the margin, the credit might encourage some new hires, although I imagine it will take more than $3000 per worker to get many companies hiring again. But I am not so sure about extending refundable credits to businesses. Obama already wants to do a lot of this for individual taxpayers. Now he’d start writing checks to businesses as well.
I am also terrified about this turning into yet another tax extender. I can imagine this tax subsidy never going away, especially for small business. And in a strong economy, it would become a huge boondoggle.
Speaking of which, Obama also wants to double down on what is already a terrible idea—an additional $25 billion “loan” to the auto industry, on top of the $25 billion approved by Congress just a couple of weeks ago. Sorry, Detroit, I know we are throwing money at banks and you want some too, but the domestic auto industry is simply no longer critical to the U.S. economy. Better that we use the money to retrain auto workers to do something else.
For his part, McCain has several proposals to cut taxes for mostly-wealthy investors. To start, he would trim the tax rate on capital gains from 15 percent to 7.5 percent, and allow taxpayers to deduct up to $15,000 in capital losses. For those age 60 and older, he’d also cut the tax rate to 10% on their first $50,000 in withdrawals from IRAs and 401(k)s. The 10 percent tax on withdrawals and the increased deduction for capital losses would apply in 2008 and 2009. The lower capital gains rate would kick in for 2009 and 2010.
TPC has not yet formally analyzed these proposals, but it is a good bet that high-bracket taxpayers will be by far the biggest winners. For instance, 75% of the benefit of low taxes on capital gains and dividends already go to those making $600,000 or more. Half goes to those making $2.8 million or more.
The timing of these changes is also problematic. For example, it seems that a “tax sale” on IRA withdrawals would encourage people to pull money out of their accounts right away—at a time when the last thing we need is more stock sales.