The next president will face daunting tax and fiscal policy challenges in his first term: nearly all the Bush tax cuts are set to expire at the end of 2010; the alternative minimum tax threatens to ensnare an ever larger group of Americans each year; the estate tax is scheduled for partial repeal in 2009, full repeal in 2010, and restoration in 2011; and Social Security and Medicare will put unprecedented demands on federal revenue.
These events offer fertile ground for fundamental tax reform, but calling for such major change could be risky in a presidential campaign. Instead, Senators McCain and Obama have both offered broad packages of less sweeping changes that would, nonetheless, shift tax policy in significant and markedly different ways.
The Urban-Brookings Tax Policy Center (TPC) has analyzed the candidates’ tax plans, estimating the effects on federal revenue and on taxpayers by income level and demographics. For more information, see TPC’s full analysis.
KEY FACTS
- Senator McCain would permanently extend the 2001 and 2003 tax cuts, increase deductions for taxpayers supporting dependents, cut the corporate income tax rate, and allow immediate deductions for the cost of certain capital equipment.
- Senator Obama would permanently extend particular provisions of the 2001 and 2003 tax cuts, primarily for taxpayers with incomes under $250,000; increase the maximum rate on capital gains and dividends; and enact new and expanded targeted tax breaks for workers, retirees, homeowners, savers, students, and new farmers.
- Both candidates would—in very different ways—extend the AMT patch, increase the estate tax exemption, reduce the estate tax rate, broaden the tax base, and reduce corporate loopholes.
- Using a “current law” baseline (where the tax cuts expire as scheduled after 2010 and the AMT isn't changed), the candidates’ non-health tax proposals would reduce revenues by $3.7 trillion (McCain) and $2.7 trillion (Obama) over the next 10 years.
- Using a “current policy” baseline (where the AMT patch is made permanent and the 2001 and 2003 tax cuts are extended), Obama’s proposals would raise $730 billion and McCain’s proposals would lose $250 billion.
- The two sets of proposals would have markedly different impacts on different income groups. Obama would raise taxes on the wealthy to help pay for middle- and lower-class tax cuts; McCain would sharply reduce taxes for the wealthy at the cost of smaller tax cuts for other income groups. (See distribution tables showing federal tax change by cash income level—details below.)
- In 2009, under Obama’s plan, households in the bottom fifth of the income ladder (those making below $18,981 in 2008 dollars) would receive an average tax cut equal to 5.5 percent of their income. Those in the middle fifth ($37,595 to $66,354) would get an average tax cut amounting to 2.4 percent of income. In contrast, taxes would rise by an average 2.0 percent of income for the those in the top fifth ($111,645 and up), with an average 8.7 percent of income increase levied on those in the top 1 percent of households ($603,402 and up). The richest 0.1 percent ($2,871,682 and up) would see an average tax increase of 11.5 percent of income, or $701,885.
- In 2009, under McCain’s plan, households in the bottom fifth of the income distribution would get an average tax cut of 0.2 percent of income, compared with 0.7 percent for those in the middle fifth. The top 20 percent of households would receive an average tax cut of 3.0 percent of income. The top 1 percent would see their taxes fall by an average of 3.4 percent of income, while the richest 0.1 percent would see an average tax cut of 4.4 percent of income, or $269,364.
Additional analysis is available in UI reports:
UI in the News
"What They'll Do to Your Tax Bill," CNNMoney.com—quotes UI experts and TPC report
"McCain's Tax Plan Favors Wealthiest, Analysis Says," The Wall Street Journal —cites TPC report
"McCain, Obama Tax Plans to Boost U.S. Debt: Tax Group," Reuters—cites TPC report, quotes UI expert
Listen to Roberton Williams, an expert on federal tax and budget issues, explain what the McCain and Obama tax plans mean for voters.
