[StBernard] McCain Vs. Obama: Economics

Westley Annis Westley at da-parish.com
Wed Oct 29 01:37:01 EDT 2008


Finally, finally. An easy to understand explanation of McCain and Obama and
how each's domestic policies & plans will impact our future. Let's see the
liberals explain this away.

John

-----Original Message-----
McCain Vs. Obama: Economics
David R. Henderson 10.28.08, 10:07 AM ET


Predicting and analyzing the economic policies of either a President McCain
or a President Obama is difficult for two reasons. The first reason applies
to all candidates in all presidential elections: They often break their
promises. But a second reason is unique to this campaign: Because President
Bush, with his bailout, has moved the U.S. toward central planning of
financial markets and because both McCain and Obama support this central
planning, predicting a future president's policies requires predicting how
each would centrally plan the economy's finances. No one can do that.

Even if candidates don't keep many campaign promises, they often move in the
direction they say they would move. So a look at the economic policies they
advocate will probably tell us something about future directions. And the
differences between Obama and McCain are quite striking--on taxes, spending
and health care.

On taxes, McCain would preserve the Bush tax cuts, due to expire in 2010,
and would cut the corporate income tax rate from 35% to 25%. Under his plan,
high-income people would pay a top federal income tax rate of 35% and the
lowest-income people would keep their rate of 0%.

Obama would preserve some of the Bush tax cuts, but would raise tax rates
substantially on single taxpayers making $200,000 or more and on married
couples making $250,000 or more. Their top rate would rise from 35% to
39.6%. Also, Obama would impose a further Social Security tax rate of 2%
(for employees) to 4% (for the self-employed) on married couples whose
income is $250,000 or more, making the top rate on earned income as much as
43.6%. Combined with the Medicare tax rate on earned income of 1.45% for
employees and 2.9% for the self-employed, the top marginal tax rate on
earned income could hit as high as 46.5%. By contrast, the top rate on
earned income under McCain would be 35% plus 2.9%, or 37.9%.

Obama emphasizes that he would cut taxes for people with incomes below
$200,000. Interestingly, though, he would not cut any tax rates on ordinary
income. Instead, he would grant various tax credits and phase them out as
people's income increases. This means, ironically, that although many
people's taxes would be lower under Obama, their marginal tax rates would be
higher. Within the income range over which the tax credit phases out, for
every additional dollar the person makes, he loses some of the credit,
adding an additional tax rate on top of the statutory tax rate. This means
that not just high-income people, but also many modest-income people, would
have a reduced incentive to make income under the Obama tax plan.

With such different tax proposals, you might expect substantially different
effects on the federal government's revenues. You would be right.
Unfortunately, the main organization that has tried to estimate the effects
of these tax proposals on revenues, the Tax Policy Center, an organization
run by the Urban Institute and the Brookings Institution, has done a fairly
poor job.

Alan Reynolds, an economist at the Cato Institute, has done a more careful
job of estimating the effects of McCain's and Obama's tax proposals on
revenue. His main finding about Obama's proposal is that the large revenues
Obama expects from raising marginal tax rates on the highest-income people
will not be forthcoming because of the various tax-avoidance strategies they
will engage in. These include switching their investments from taxable bonds
to tax-free municipal bonds, becoming a one-earner family (the vast majority
of high-income families have both husband and wife working, a main reason
they are high-income) and increasing their 401(k) contributions. Obama's
higher marginal tax rates will lead to more federal government revenue, but
not nearly as much as he claims.

And, concludes Reynolds, while McCain's cut in corporate income tax rates
will yield less revenue, the revenue loss is not nearly as much as the Tax
Policy Center claims because the U.S. has one of the highest corporate tax
rates in the industrial world and would, by cutting the tax rate, make the
U.S. a more attractive place to invest.

On the budget side, Obama advocates substantial new spending on domestic
programs and less spending on the Iraq war. McCain advocates continuing the
high spending on the Iraq war and less spending on the domestic side but has
not spelled out, other than ending the federal government's subsidy to
ethanol and a vaguely defined federal budget freeze, where he would cut.
Asked by Jim Lehrer in the first debate which of his spending priorities he
would give up to pay for the $700 billion bailout, Obama instead listed
things he would not give up. It is difficult to estimate, therefore, the
effect on the budget deficit that either would have. A reasonable bet is
that the deficit, which some expect to hit the previously unimagined $1
trillion, or 7% of gross domestic product, in the current fiscal year, will
be higher under Obama than McCain, but, in any case, will be obscenely high.

On trade, McCain favors free trade more strongly than Obama, although,
according to Obama's economic adviser, Austan Goolsbee, during the
Democratic campaign for the nomination, Obama exaggerated his dislike of
NAFTA.

On health care, the two are radically far apart. McCain would make all
employer contributions to employees' health insurance taxable as ordinary
income, but would offset this few-thousand-dollar tax per family with a
$2,500 tax credit for single people and a $5,000 tax credit for married
people. Almost all people would end up with a net tax saving. McCain's idea
is to give people an incentive to be frugal health insurance purchasers
because their cost of an additional dollar of insurance would be $1 rather
than the less-than-one-dollar cost it is now when their employer provides it
tax-free.

McCain would also let people buy insurance from other states under those
states' regulations so that, for example, if they wanted to buy from a
less-regulated state where the government-mandated requirements are fewer
and insurance premiums are lower, they could. Obama would move more in the
direction of socialized insurance, providing a Medicare-like government plan
for people under age 65 and expanding Medicaid. He would also require
employers to provide health insurance for their employees or pay a tax
instead.

While by free-market standards, McCain's proposals are far superior to
Obama's, both have given away the store by voting earlier this month for
central planning of financial markets.

David R. Henderson is a research fellow with the Hoover Institution, an
associate professor of economics at the Naval Postgraduate School, and the
editor of The Concise Encyclopedia of Economics (Liberty Fund, 2008).





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