Next president may be hamstrung by bailout

updated 4:58 p.m. ET Oct. 5, 2008

WASHINGTON - Even with the $700 billion bailout, the financial crisis and fragile economy promise to loom large over the opening days of the next administration.

Dealing with the housing and credit problems that President Bush says will take “some time” to clean up could threaten the economic policies advanced by Democratic Barack Obama and Republican John McCain.

Obama acknowledges “the next president will have to scale back his agenda and some of his proposals.” Yet neither camp is eager to say precisely what changes might have to be made — promises broken or delayed.

Obama’s running mate, Sen. Joe Biden, was questioned about that in Thursday’s vice presidential debate. He could list only a few: cutting wasteful spending and “we might have to slow down a commitment we made to double foreign assistance.”

His GOP counterpart, Sarah Palin, was asked if there was any campaign promise she would have to take off the table because of the financial crisis. “There is not,” she said.

Newly elected presidents have a good track record in winning approval of major tax bills and other legislation in their first year in office.

The next president probably will lay out an ambitious agenda, possibly soon after the election and amid great constraints: the financial crisis and a rising budget deficit projected by the Congressional Budget Office to reach a record $438 billion next year — and that’s before figuring in the bailout’s first-year cost.

Central to the nominees’ tax proposals is that an array of Bush tax cuts are due to expire in 2010.

McCain would keep tax rates low for everybody, including higher-income people. For companies, he would slash them from the current 35 percent to 25 percent, arguing it is the best way to jolt the economy and create jobs.

Obama, who says his program would most help the squeezed middle class, would retain Bush tax cuts for families making less than $250,000 a year and individuals making less than $200,000. He would do away with them for people above those levels.

The Illinois senator also has proposed raising the top marginal income-tax rate, now 35 percent, to 39.6 percent, and raising the current 33 percent rate to 36 percent. The money raised from tax increases on the wealthy would be redirected by Obama to tax relief for lower-income people.

McCain has proposed increasing the dependent exemption, but not the personal exemption for the taxpayer and spouse, from $3,500 now to $7,000 by 2016.

Both have proposed making marriage penalty relief permanent.

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Under Obama’s approach, the wealthiest 1 percent of taxpayers, those making roughly $600,000 or more, would see their taxes go up on average by $93,709 in 2009, according to the nonpartisan Tax Policy Center, because Obama would begin putting in place the changes before the scheduled expiration of the Bush cuts.

For McCain, those same wealthy taxpayers would see an average reduction of $48,860, reflecting in part additional cuts he is proposing.

By contrast, the bottom 20 percent of taxpayers, with taxable income of roughly $19,000 per year or less, would see their taxes cut by an average of $567 under Obama’s program and $21 under McCain’s plan, the tax center estimates.

For the 20 percent of taxpayers in the middle, making roughly between $37,600 and $66,400, the tax break would be $1,118 under the Obama plan and $325 under the McCain plan in 2009, according to the center’s analysis.

Obama would raise the top rate on capital gains and dividend income, now 15 percent, to 20 percent for families making over $250,000. McCain would keep both at 15 percent.

Obama has proposed excluding people age 65 and older from federal income tax liability if they earn $50,000 or less, along with creating a new tax credit of up to $1,000 for lower- and middle-income families ($500 for individuals) to offset federal payroll taxes.

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