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McCain Camp Distorts Obama's Tax Policies, Exaggerates Their Adverse Impact

Wednesday, June 11, 2008

Sen. John McCain's camp is attempting to convince Americans that their taxes will increase dramatically with Sen. Barack Obama as president. The presumptive Republican nominee has repeatedly said that Obama would enact "the largest tax increase since the Second World War." A surrogate for McCain, former Hewlett-Packard CEO Carly Fiorina, insists that Obama has not proposed "a single tax cut" and wants to "raise every tax in the book."

THE FACTS

There are significant differences between the two candidates on tax policy. McCain would like to make permanent President Bush's tax cuts of 2001 and 2003, and has proposed a few of his own. Obama favors allowing the tax cuts to expire as scheduled for Americans earning more than $250,000 a year.

He would raise taxes on capital gains and dividends, but has also promised tax breaks for lower- and middle-income Americans. McCain's speech to the Small Business Summit yesterday leaves the impression that Obama favors raising taxes on all Americans. But his words have been carefully parsed. A more literal reading suggests that he could also be talking about some Americans from "every background," not "all Americans." The key issue is how many lower- and middle-income Americans would be affected by Obama's proposed tax increases.

To substantiate its assertion that large numbers of ordinary Americans would be worse off under the Democrats, the McCain camp points to Obama's proposal to raise tax rates on dividends and capital gains. Obama's advisers argue that any tax increases would be offset by credits for lower-income families. They also point out that most middle- and lower-income families invest in the market through 401(k) plans, which are exempt from capital gains taxes.

Maya MacGuineas, a budget expert at the New America Foundation, said the McCain camp is trying to create an exaggerated impression of the number of people from lower- and middle-income groups who would be hurt by Obama's tax proposals. "It is legitimate to say that they can find a cleaning person or a waitress somewhere who will be affected, but the numbers should not be overwhelming," she said.

The statement that Obama would "enact" the largest tax increase since World War II is also overblown. Bush's cuts will expire automatically at the end of 2010, so it is hardly a question of "enacting" a new tax increase. According to Obama economics adviser Jason Furman, the revenue raised from letting the tax cuts expire would be returned to middle- and lower-income taxpayers in the form of tax credits to pay for health insurance, so the overall effect would be revenue-neutral.

McCain spokesman Brian Rogers pointed to an analysis by the nonpartisan Annenberg Political Fact Check that found that the gross tax increase would amount to $103.3 billion in 2011, the largest single-year tax increase since World War II. The Annenberg study pointed out, however, that "most economists" prefer to measure tax changes as a percentage of gross national product, in which case it would be the fifth-largest increase since 1943.

According to Brookings Institution economist Douglas W. Elmendorf, Obama's plan would eliminate income taxes for 10 million Americans. "It's very clear that taxes for lower-income Americans will decline under Obama," he said.

THE PINOCCHIO TEST

Fiorina is wrong to assert that Obama has proposed no tax cuts and wants to raise "every tax in the book." McCain is on more solid ground when he says Americans from many backgrounds could be affected by a rise in capital gains, but he has greatly exaggerated the adverse impact.

ONE PINOCCHIO: Some shading of the facts; TWO PINOCCHIOS: Significant omissions or exaggerations; THREE PINOCCHIOS: Significant factual errors; FOUR PINOCCHIOS: Real whoppers; THE GEPPETTO CHECK MARK: Statements and claims contain the truth, the whole truth and nothing but the truth.

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