Less than an hour after Howard Gleckman posted a blog entry on the presidential candidates’ tax plans, a question came in about TPC’s finding that Senator Obama’s plan would increase taxes of a low-income elderly couple by $150. How, the commenter asked, could that happen if Obama said he’d eliminate taxes for elderly households with income under $50,000?    more »

Barack Obama has a plan to fix Social Security. Or does he? Obama does have a vague proposal to raise payroll taxes for workers making more than $250,000. But there is a lot less to it than meets the eye, and Obama has left some hugely important questions unanswered.    more »

I'll be moderating what should be an interesting discussion on fundamental tax reform at the New America Foundation on Tuesday. Other panelists will be New America's Maya MacGuineas and Michael Lind, and Yale University's Mike Graetz, who has designed a new Value Added Tax. If you’d like to join us, sign up at NAF's website.

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.

Johnny, we hardly new ye.

John McCain’s ambitious plan to reform corporate taxes is disappearing faster than the Washington National's chances to win the national league pennant. What once had the makings of a provocative and potentially beneficial idea is morphing into a gimmicky mess.

Earlier his spring, McCain was talking about allowing companies to expense all their capital investments in the year they are made. This would eliminate many of the timing-related issues that make corporate taxes so complicated. It might even have become the first step towards replacing the income tax with a cash-flow levy. In such a system—a version of a Value Added Tax—companies would subtract their costs of goods from revenues and pay tax on the difference.

Back then, McCain had not yet answered one big question: What would happen to the tax deduction companies take for their interest payments? In any sensible expensing scheme, interest could no longer be tax deductible. If it were, businesses would become huge tax shelters.

Now that he’s started to answer this and other questions, his idea is getting worse. In his revised plan, which staffers have described to TPC, expensing would be limited only to short-lived property—equipment like cars and computers--now depreciated over five years or less. The proposal would be temporary, and would expire after five years. Interest payments would be taxable, but only if used to finance specific short-lived investments.

Yuck. Speeding up a deduction that you could take in a couple of years anyway is not much of a tax break. Making the proposal temporary just creates messy new timing issues—and would threaten to become yet another tax “extender” that is part of the annual Washington theater. And tying the interest deduction to the purchase of specific property will surely create endless opportunities to game the system. This will bring joy to the hearts of investment bankers and tax lawyers, but not to the rest of us.

The best that can be said about McCain's latest version is that perhaps it is an effort to shove the tip of the camel’s nose under the proverbial tent: Start with this and get more ambitious later. But that's a reach. Don’t get me wrong, McCain’s initial proposal had its problems, but it was intriguing, potentially far-reaching, and worthy of debate in a presidential campaign. This version will fall into the dust-heap of forgotten ideas. There was a brief moment when I thought we were going to have a serious tax reform debate in this campaign. I should have known better.

Barack Obama’s tax plan will either raise $262 billion over the next 10 years or increase the national debt by $2.7 trillion. John McCain would add either $615 billion or $3.6 trillion to the debt.

What’s going on? Don’t everyone turn your computer off at once, but we need to talk about budget baselines.

There is nothing more esoteric, but Obama and McCain have made them hugely important. Trillions of dollars important. In fact, the only way either candidate can establish even a nanobit of fiscal credibility is by dramatically reframing the deficit discussion.

Both want to convince us that the Bush tax cuts will go on forever, even though they are due to expire in 2010, and that the Alternative Minimum Tax mess has already been fixed, although a permanent solution is nowhere in sight. With these helpful assumptions, their trillions of dollars in tax cuts look modest. Both candidates can make it appear as if they are merely moving around a bit of loose change, rather than massively increasing their grandchildren’s debt.

This is nothing more than a fiscal parlor trick. McCain, at least, can argue that he has supported the Bush tax cuts—well, he supported them after he opposed them. Obama has voted time and again against extending them and calls them irresponsible. What is likely to be a strongly Democratic Congress will never vote to sustain them as is. Yet, both Obama and McCain would like us to believe these tax cuts are cast in stone—the fiscal Ten Commandments, if you will—even as they propose to change them.

Neither seems to have noticed that Washington routinely overhauls the tax law every decade or so. When it comes to taxes, change is the status quo.

There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.

TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down.

Thus, Obama would have to cut spending by 1.3% of GDP or $230 billion, to balance the budget in 2013. McCain must find 1.7% of GDP, roughly $300 billion. For context, Bush and the Congress have been battling for years over budget cuts one-tenth that size.

I await word on the candidates’ additional spending cuts. Obama has embraced costly new initiatives for infrastructure, education, health care, and energy, but said little about exactly where he’d cut spending. McCain vows to cut pork, which might get him 5% of what he needs. On the other hand, he is not likely to end the war any time soon.

We have updated our preliminary estimates of the revenue effects of the candidates’ tax plans. Our estimate for the ten-year revenue change compared with current law from Senator Obama’s plan is identical to that in our original study—a $2.7 trillion revenue loss. Our updated projection for Senator McCain’s plan shows a revenue loss of $3.6 trillion instead of $3.7 trillion. With interest costs, Obama would add $3.3 trillion to the national debt, while McCain would increase the debt by $4.3 trillion.

Our new estimates also show that if current policy is extended beyond 2010—the way both candidates prefer to describe their plans—Obama would raise $262 billion in tax revenues and Senator McCain’s would reduce revenues by $615 billion. Our initial estimates understated the revenue loss for McCain and overstated the revenue gain for Obama against this baseline. We also made minor revisions to some other estimates.

Note that our estimates for the candidates’ plans reflect some of the ways people change their behavior when tax laws change. For example, some people can be expected to switch from taxable to tax-exempt bonds when rates increase. In the past, we estimated only the static effect of tax changes. Static scoring had the virtue of simplicity—most estimates came straight from our tax model—but the disadvantage that they were not strictly comparable with official revenue estimates, which do account for behavioral responses. We plan to reexamine our assumptions and methodology before we release the next update of our paper on the candidates’ tax plans. We also expect the next version to include an analysis of both candidates’ health proposals and more analysis of proposals we left out of our original version: Obama’s stated plan to increase Social Security taxes on those earning over $250,000 and McCain’s proposal to allow taxpayers to elect a simplified alternative tax system.

We've heard from the Obama campaign about our blog post on Senator Obama's Social Security tax increase on people earning more than $250,000. The campaign clarified that the threshold would be $250,000, but Senator Obama has not specified what the rate would be, when it would take effect, whether it would apply to employers, employees, or both, or what the tax base would be.   more »

In preparing our analysis of the candidates’ tax plans, we sent descriptions to each campaign for comment/clarification/correction. Senator Obama’s staff asked us not to include his reported support for a Social Security tax on earnings above $200,000 or $250,000, saying that there was no specific proposal. So we left the Social Security proposal out of our core analysis. We also left out Senator McCain’s proposal for an optional alternative tax system on similar grounds. We did discuss these non-proposals in two sidebars in our analysis.   more »

Barack Obama looks at the U.S. economy and worries about recession—which he would cure with a $50 billion stimulus bill. Increasingly, Fed Chairman Ben Bernanke looks at the same economy and sees inflation—which he would treat by raising interest rates.    more »

In the first detailed analysis of the Barack Obama and John McCain tax plans, the Tax Policy Center has run their proposals through the Big Computer and discovered that their schemes are, well, painfully predictable. Each would raise the national debt by trillions of dollars. Obama would use the money to provide modest tax cuts to low- and moderate-income people while imposing stiff tax hikes on the very wealthy. McCain would cut taxes a bit for the working-class and a lot for the rich.    more »

I've just finished two terrific new books: High Wire: The Precarious Financial Lives of American Families by long-time LA Times reporter Peter Gosselin, and Hospital by Julie Salamon. In quite different ways, each illuminates some of the critical social policy issues of our time.    more »

As 401(k) plans and other defined contribution savings vehicles have become more popular in recent years, retirement experts have become increasingly worried about how workers can make these funds literally last a lifetime. Too often, retirees withdraw the money too quickly and end up outliving their savings or, worse, take the whole pot of cash and go off to buy that bass boat they’ve always wanted.    more »

Interesting confluence of events: Barack Obama is about to wrap up the Democratic Presidential nomination and the Senate has begun debating a major plan to cap carbon emissions—an idea Obama strongly supports.   more »