Candidate Deathmatch I - Taxes

Over the past two days, both nominees have offered glimpses of their economic platform. Senator Obama spoke in Raleigh, North Carolina on Monday (the transcript of his speech can be found here) and Senator McCain spoke yesterday to members of the National Federation of Independent Business in Arlington, Virginia (the transcript of his speech can be found here).

The punditry buzz on these economics speeches is that with the economy experiencing volatile hiccups over the past few months and with the majority of Americans believing that we are in a recession and maybe a deep one at that, Obama decided to steer the message of his general campaign towards the economy in an effort to avoid the war and foreign policy, areas that McCain arguably has more experience.

I thought it might be fun to “deconstruct” the candidate’s economic platforms in true Momocrats fashion, a la Candidate Deathmatch. Each candidate starts out whole, and then body parts get chopped off depending on whether I think their proposal is good or bupkus. I’m also breaking the discussion into 3 pieces: taxes, debt and miscellaneous, because there was an awful lot covered, and I don’t want to bore everyone to death. We are trying to make sure readers make it through November so that they can vote for O’Boyfriend.

So without further ado, I present Candidate Deathmatch I: Obama vs. McCain – Taxes.

Capital Gains Tax

First, Obama started by saying that he wants to realign our tax code to reward work over wealth. Obama starts out strong with a huge upper cut! We currently have a tax code that absolutely rewards wealth over work. When you look at the income tax brackets, families earning over $65,000 per year (which is where I would roughly start the middle class) has a marginal federal tax rate of 25%. Compare this to the capital gains rate where, regardless of how much you may earn from capital gains, the tax rate is a flat 15%. To take an easy example, if you are a family earning $100,000 per year, $35,000 of your income will be taxed at 25%. However, if you are a family earning $1,000,000 per year from your equity investments, all of your “income” is taxed at 15%. And the worst thing is, there are lots of ways that a clever lawyer can turn what is effectively income into capital gains to take advantage of the lower tax rate. And who can afford clever lawyers? Well, I guess people that make over $1 million a year, eh?

Why the different tax rates? The argument has been that the rates for capital gains has to remain low in order to encourage investment. As McCain said in his speech, low rates on capital gains encourage small businesses to expand and create jobs. If this is entirely true, then why should interest income be taxed at income rates? Your most typical interest income comes from deposits at the bank, which is really money that the bank takes and in turns lends out to small businesses so that they can expand and create jobs. This looks a lot like “investment” to me.

The conspiracy theory take on this is that this is just one more way to screw the little guys. Interest based investments are far safer than any equity based investments. You are guaranteed a yearly return, and the biggest risk is that you choose a variable rate, so that sometimes you get more and sometimes less. Equity investments are ones where you might win little, you might win big, or you might just lose your shirt. And if your sole source of income happens to not be equity based, what is the likelihood that you can dedicate the kind of time and resources that someone whose entire fortune is tied up in it could? It’s an impossibility. So it goes without saying that small investors are much more likely to get smaller gains and suffer greater losses than big investors.

McCain and other Republicans argue that since more Americans are invested in the stock market than ever before, an increase in the capital gains rates would hurt Americans across the board. This is only marginally accurate, and takes such a tax increase out of context. First, most middle and low-income families invest in the market through 401(k) or other retirement plans that are exempt from capital gains taxes. Second, if such a tax increase is coupled with a reduction of income taxes, most Americans would probably come out ahead.

McCain loses a leg.

Income Tax

Obama favors allowing the tax cuts to expire as scheduled for Americans earning more than $250,000 a year whereas McCain would like to make the Bush tax cuts of 2001 and 2003 permanent. Obama has also promised tax breaks for low and middle-income Americans. As discussed above, this would be a companion provision to Obama’s plan to increased capital gains tax.

What does this actually mean? Under Obama’s plan families earning $250,000 to $360,000 would see their marginal tax rate increased from 33% to 36% and families earning over $360,000 would see their marginal tax rate increased from 35% to 39.6%. Obama has not yet released information about his proposed tax breaks for lower and middle-income Americans.

Do these tax increases make sense? This is clearly a highly personal determination, but think of it this way – would you really mind paying high rates, even upwards of 40%, on your capital gains, if you were keeping more of your work pay dollars. For most Americans, this is a no-brainer. They would absolutely take higher rates on their investment returns if it meant lower rates on their income.

Republicans in general and McCain in particular favor tax cuts because of the theories of supply side economics, which posits that as tax rates are reduced, tax revenue actually increases. There are two main explanations for this: (1) lower tax rates encourages economic activity, which then generates more tax revenue and (2) in the case of capital gains tax, when the tax rate is reduced, there is a mad rush to lock in gains and get the benefit of the reduced rates.

Whether or not supply side economics is valid, it seems irrelevant in this situation. Obama is proposing an increase in the tax rates for only a small segment of Americans, whose economic activity could hardly be compared to the other 80% of America. If lower and middle class Americans are actually experiencing a net decrease in their tax burden, they will have more incentive to participate in the economy and generate that much desired economic activity.

McCain loses another leg.

Estate Tax

McCain favors a permanent repeal of the estate tax. Obama does not.

Currently, we are in the process of “phasing out” the estate tax. Under the pre-Bush estate tax system, each individual can pass $1 million to his successors tax free. Additional amounts were taxed at a 55% rate. With the Bush tax cuts, this exempt amount has been increasing gradually over the past several years, to $2 million this year and $3.5 million by 2009. In 2010, the estate tax will be fully repealed, but only for one year and in 2011, the estate goes back to pre-Bush rates. This has caused many legal pundits to call the Bush estate tax repeal the “throw mama from the train” provision.

As Obama has said, “the estate tax affects only the wealthiest one-third of 1% in 2009. Repealing the estate tax would cost $1 trillion, and it would be hard to find a tax cut that was less responsive to the needs of ordinary Americans or the long-term interests of the country.”

McCain loses an arm.

Other Taxes

McCain stated that he would double the child tax exemption and phase out the AMT as well as make the tax system less complicated.  Obama proposes that no income tax be levied on retirees making under $50,000 a year.

Total draw. I think these are all wonderful suggestions.

McCain gets a “boo-boo band-aid” for one of his “flesh wounds”.

When Kady isn't sucking at drawing stick figures, she's blogging at Loaded Dice.

Comments

[Julie Pippert]

Well done!

[Mark Elyea]

Your whole premise is that if you are wealthy you should pay more. Why?

Fairness?

Fairness would be EVERYONE paying the exact same tax rate. A flat 10% to 15% across the board would be fair and, who cares where the income is derived from?
Look at history. Redistribution of wealth has never and will never work. As long as there are humans involved there will always be greed and jealousy, always those who strive for POWER over SERVICE.

We (parents) must teach our children SERVICE over ENTITLEMENT. Always give back to those in need, really in need. Be responsible for your actions and inactions.

Did you know there was a time when the wealthy had a 90% tax rate and still the tax revenue as a percent of the Gross National Product was the same? 19%

Taxing the wealthy always makes us FEEL better, that’s all it does. The only way to make things better than they are right now, (and things are pretty darn good right now) is to increase the GNP. As America does, so does its people, the wealthiest and the poorest.

How about stopping the money that goes into programs that do not work! Have you looked at the listing of Federal Departments and Agencies? (http://www.usa.gov/Agencies/Federal/All_Agencies/index.shtml)
There is a lot of work that can be done in just reducing the size and therefore the expense of our Federal Government.

Give the power back to the State and local governments. Then you and I could have more say in those things and ideas that REALLY affect our day to day lives.

Change, yep, we all want it. Just remember not all change is for the good. I want good change. I want less government, not more. Do you REALLY want the same people who run the welfare system, and the prison system, and the education system to run the healthcare system? I don’t.

Be it a Democrat or Republican, all I want is a little truthful common sense.

[Lawyer Mama]

OK, I'm totally picturing Monty Python & the Holy Grail here. McCain is down on the ground yelling at Obama, "Come back here! I'll bite your knee caps off!"

And what hole did Mark crawl out from? Since when are taxes "income redistribution?" Oh right... all Democrats are communists or socialists. Sorry, I forgot.

Taxes affect the poor proportionally more than they do the rich. Because, duh, they have less (or no) discretionary income. That's why we have a graduated income tax system, Mark.

Oh & Mark - maybe you should go work for a health insurance company for awhile so you can get to know those people who are *currently* running our health care system. Having worked for one I can tell you that there ain't a hill 'o beans between a beauracrat and a corporate insurance company employee processing your claims.

[Lawyer Mama]

Sorry, I was feeding the trolls again.

My bad.

[Mark Elyea]

Again, anyone with a differing opinion crawls out of a hole. I have been called a ground pig more than once in my life.

First, I spent 20 years in the military in service to my country, not for the pay. Second, I worked for Goodwill Industries. Putting people to work, getting them off of welfare, providing for their needs, and putting respect back into lives. Third, I currently work in the healthcare industry. I have seen the faces of the people we are helping in Iraq, smiling faces, faces of hope, and faces of gratitude. I have held starving children in my arms; I have pulled people out of the wreckage after their homes had been destroyed by storms. That’s the hole I have crawled out of.

When is the last time you helped someone truly in need. Raising our children to care about and help the people around them will go a long way to solving our problems. Our school system, and by way of negligence us as parents, have instilled a culture of entitlement and selfishness. That needs to change. There that word is again, change, where have I heard that? As John F. Kennedy said, “Ask not what your country can do for you but what you can do for your country”. Is that really what is in the current Democratic leadership’s minds or hearts? From what I have heard coming out of their mouths, not!! The democratic party of today is not the democratic party of our fathers. And the Republican Party is not that of tyranny and self interest as most of the media has insisted they are. There are poor people is this country because we (you and I) let there be. There are staving and homeless people in this country because we let them be. It’s you and I, not the government. We just want someone else to take care of our problems. That is not what this country was founded on, that is not what this country’s peoples need, and that is not what I want!

Let’s focus on a few GREAT things and get them right, and then move on.