Huge price tag may thwart tax cut plans

John W. Schoen Senior producer • Profile • E-mail

When Joe the Plumber emerged to play a leading role in the last presidential debate, he unwittingly turned the spotlight on the single question most Americans want to know before they choose a president. Which one of you guys is going to give me a bigger tax break?

But as voters try to decode their tax proposals, the recession and financial bailout are curtailing the candidate's ability to keep their multitrillion-dollar promises.

For all the recent stump speeches on the tax topic, details are still tough to nail down. Both candidates’ plans are also something of a moving target, according to analysts who are trying to follow their tax proposals.

“It’s become kind of a day-to-day thing to keep track of what they’re throwing out on the stump,” said Pamela Villarreal, a senior policy analyst at the National Center For Policy Analysis, a conservative-leaning think tank. “It’s been very challenging.”

Those recent shifts on the campaign trail aside, the broad outlines of both candidates’ tax proposals are becoming a little clearer in the final stages of the campaign. A weakening economy and tightening household budgets have only heightened voter interest in the subject.

Arizona Sen. John McCain favors broad-based tax cuts — including an extension of the large tax cuts enacted early in the Bush administration. The McCain campaign, like every Republican presidential campaign since Ronald Reagan's, argues that broad tax cuts will help get the economy back on track, create more new jobs and help taxpayers at all economic levels.

Illinois Sen. Barack Obama has proposed targeting tax cuts to people at the lower end of the economic ladder, and letting tax cuts expire for individuals making more than $200,000 a year and couples making more than $250,000. The Democrat's campaign argues that tax cuts for the wealthy have failed to benefit middle- and lower-income workers, who have seen their wages stagnate since the recession of 2001.

“The two candidates essentially take the philosophy their parties have taken for years,” said Roberton Williams, co-author of a widely cited study analyzing both proposals by the centrist Tax Policy Center, an independent tax research group.

The candidates have turned up the heat in the final weeks of the campaign to highlight those philosophical differences.

At a recent rally in St. Louis, Obama told the crowd that McCain “wants to cut taxes for the same people who have already been making out like bandits — in some cases literally.”

Wealthy taxpayers would fare better under McCain’s tax plan, which would leave the top tax bracket for individuals at the current 35 percent; McCain would cut the corporate tax rate from the current 35 percent to 25 percent. Obama has said he would raise that top bracket to 39.6 percent and raise the current 33 percent bracket to 36 percent.

Obama says he will cut corporate taxes but doesn’t cite a rate. But he also says he’ll close loopholes – which would raise taxes for some corporations.

Fact file | Presidential plans Links to the candidates' Web sites Click here to read more about McCain's plans Click here to read more about Obama's plans (.pdf file)

McCain also wants to double the current $3,500 per-child exemption to $7,000 by 2016.

McCain argues that Obama’s plan would “convert the IRS into a giant welfare agency, redistributing massive amounts of wealth at the direction of politicians in Washington.”

Obama’s proposals would likely create more direct payment to those on the lowest rungs of the income ladder by expanding the size and the number of tax credits that are “refundable.” Under current law, some tax credits are available only to offset taxes owed; if your credits are bigger than your tax bill, you lose the credits. Obama is proposing that more of these credits are paid in full — even if that means having the government write a check to individuals and households.

In addition to the current Earned Income Tax Credit, Obama would extend the list to include an additional credit for 6.2 percent of the first $8,100 of income; an education credit of up to $4,000 a year; a “savers” credit of 50 percent of the first $1,000 saved for retirement, and a credit for 10 percent of mortgage interest for people who don’t itemize. He also wants to eliminate taxes for seniors earning $50,000 or less.

The campaigns have squared off on the impact of their tax proposals on small businesses, including that Ohio plumber, Joe Wurzelbacher, who aspires to own a plumbing supply business.

For all the commotion surrounding his question to Obama on the campaign trail, it’s hard to know which candidate’s proposal would better suit Joe the Plumber; much depends on how his business is structured and how much income it generates. But in general, small businesses would not be hit with a tax increase under Obama’s plan, say tax analysts. Some might even benefit from Obama’s tax cuts, according to Robert McIntyre, director of Citizens for Tax Justice.

“The vast majority of small businesses make less than $250,000 a year,” he said. “They’re the ones that would benefit" under Obama’s plan.

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

NYT: U.S. forecasts smaller loss from bank bailout Obama talks of jobs plan in weekly address Productivity rises by largest amount in 6 years Bleak job scene poses challenge for Obama 'Problem' banks at highest level in 16 years RV industry no longer running on empty Long-term unemployed face dwindling options  Obama warns of 'double-dip recession' One in four metro areas in recovery mode Geithner warns lack of loans may slow recovery Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: