Candidates Diverge on Tax Policy

(Released July 10) WASHINGTON — With the national debt at a record $9.5 trillion and rising, and the tax cuts of 2001 and 2003 set to expire in two years, both John McCain and Barack Obama are proposing major changes in federal tax policy.

Each has proposed simplifying income tax returns and reducing, though not repealing, estate taxes.

Both candidates want to retain the current income tax brackets - 28, 33 and 35 percent - which are set to increase to 31, 36 and 39.6 percent in 2010. Obama would retain a 10 percent tax rate for low-income workers; McCain has not proposed to keep that rate.

In general, McCain's tax cuts "would primarily benefit those with very high incomes," while Obama "offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers," according to an analysis by the non-partisan Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

Some of the perceived inequity is inherent in a system that bases taxation on earnings; by design, that means high-income earners pay higher taxes and benefit the most when taxes are cut.

McCain's policies would aim to stimulate the economy and investment, but at the cost of future deficits. Obama would try to help low-income workers but create new subsidies for seniors already favored by current tax laws, while also fueling deficits, the center concludes. Here is a look at their approaches:

McCain

Key Positions

- Make 2001 and 2003 tax cuts permanent.

- Cut the top corporate rate to 25 percent, from the current rate of 35 percent.

- Repeal certain oil and gas tax breaks and eliminate other corporate loopholes.

- Raise the personal exemption for dependents - currently $3,500 - to $7,000 by 2016, a two-thirds increase, after allowing for inflation.

- Married couples earning $50,000 or less would be eligible for a $7,000 exemption for each dependent immediately (2009).

- Cut top estate tax rate to 15 percent, from the current rate of 45 percent, and raise exemption to $5 million, from current level of $2 million.

Cost

Taken together, McCain's tax cuts would reduce federal revenues by $3.6 trillion over a decade - about 10 percent of projected revenues over that period - according to the analysis by the Tax Policy Center. McCain says the cuts would spur economic growth that would offset the projected revenue losses.

His Record

Although he now supports making the 2001 and 2003 tax cuts permanent, at the time McCain bucked his party and voted against them. He said the cuts mostly benefited the wealthy and that spending cuts weren't sufficient to offset lost revenues. In 2006, he received a rating of 88 (out of a possible 100) by the National Taxpayers Union, a conservative group that seeks to cut government spending and taxes. For his 2005-2006 voting record, he received a rating of 50 (out of a possible 100) by Citizens for Tax Justice, a nonpartisan group that seeks lower taxes for middle-class and low-income Americans and reductions in the federal debt.

In His Words

"If you believe you should pay more taxes, I am the wrong candidate for you ././. I will cut them where I can ././. When you raise taxes in a bad economy you eliminate jobs. I'm not going to let that happen." (July 7)

Obama

Key Positions

- Make 2001 and 2003 tax cuts permanent for taxpayers earning less than $250,000 a year.

- Create tax credit of up to $500 per person, or $1,000 per family, for working poor, to offset all income taxes on the first $8,100 of earnings, effectively wiping out income taxes for 10 million low-income Americans.

- Eliminate income taxes on people over 65 who make less than $50,000 per year.

- Raise annual college tuition tax credit to $4,000 for students willing to perform 100 hours of community service after graduation. Current top credit is $1,800.

- Eliminate certain oil and gas tax breaks and other corporate loopholes.

- Retain top estate tax rate of 45 percent and raise the exemption to $3.5 million.

Cost

Taken together, Obama's tax cuts would reduce federal revenues by $2.7 trillion over a decade - about 7 percent of projected tax revenues over that period - according to the analysis by the Tax Policy Center. Obama argues that his plan would make the tax system more equitable and would promote full employment, largely offsetting any revenue losses.

His Record

Elected to the Senate in 2004, Obama did not vote on the watershed tax cuts of 2001 and 2003. Last year, he was one of four senators to introduce legislation that would provide tax credits for companies that, among other things, don't hire more additional workers overseas than they hire in this country. The bill is awaiting committee action. In 2006, he received a rating of 16 (out of a possible 100) by the National Taxpayers Union, a conservative group that seeks to reduce government spending and taxes. For his 2005-2006 voting record, he received a rating of 100 (out of a possible 100) by Citizens for Tax Justice, a non-partisan group that seeks tax cuts for middle-class and low-income Americans and reductions in the federal debt.

In His Words

"The tax code has been written on behalf of the well-connected ... What I want is not oppressive taxation. I want businesses to thrive. And I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair." (April 16)