McCain Tax Cuts Favor Taxpayers (aka, ‘Wealthy’)
The two candidates’ plans would have sharply different distributional effects. Senator McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households. Many fewer households at the bottom of the income distribution would get tax cuts and those whose taxes fall would, on average, see their after-tax income rise much less. In marked contrast, Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers. The largest tax cuts, as a share of income, would go to those at the bottom of the income distribution, while taxpayers with the highest income would see their taxes rise.
This is not exactly rocket science. McCain’s efforts focus on the federal income tax and capital gains taxes, which disproportionately impact . . . wait for it . . . those with high incomes and capital gains. According to a 2005 Treasury Department report, “Who Pays the Most Individual Income Taxes?”
• In 2002 the latest year of available data, the top 5 percent of taxpayers paid more than one-half (53.8 percent) of all individual income taxes, but reported roughly one-third (30.6 percent) of income.
• The top 1 percent of taxpayers paid 33.7 percent of all individual income taxes in 2002. This group of taxpayers has paid more than 30 percent of individual income taxes since 1995. Moreover, since 1990 this group’s tax share has grown faster than their income share.
• Taxpayers who rank in the top 50 percent of taxpayers by income pay virtually all individual income taxes. In all years since 1990, taxpayers in this group have paid over 94 percent of all individual income taxes. In 2000, 2001, and 2002, this group paid over 96 percent of the total.
I was unable to locate a more recent version of this but there’s no reason to expect that the trends have moved in the opposite direction; indeed, it’s more likely that the wealthier are paying an even higher percentage now.
Despite the myth that everyone pays income taxes, an illusion enhanced by payroll withholding, the fact is that most people in the bottom half of wage earners get enough deductions and tax credits that they’re not paying into the system at all. Obama’s plan would actually make an even larger segment of the society free riders.
It’s worth noting, though, that we’re not talking about drastically different levels, with McCain the champion of laissez faire and Obama pushing for a dictatorship of the proletariat.
The impact of the tax code on economic activity under each candidate’s policies would differ in several important ways. With Senator McCain’s proposed policies enacted, the top marginal rates (35 percent on individual income and 25 percent on corporate income) would be significantly lower than under Senator Obama’s plan (39.6 and 35 percent, respectively). McCain’s reduced individual and corporate rates would improve economic efficiency and increase domestic investment, but the larger deficits he would incur to do so would reduce and could completely offset any positive effect. In contrast, Senator Obama’s proposed new tax credits could encourage desirable behavior, particularly if the childless EITC and payroll tax rebate encourage additional labor supply among childless low-income individuals. However, he would also direct new subsidies at an already favored group-seniors -and an already favored activity-borrowing for housing-which could probably be better directed elsewhere.
Obama’s main redistributive proposal, though, is to raise the FICA ceiling, requiring high earners to pay Social Security taxes on more of their income. Given that we’re going to continue this generational transfer of wealth into the future and nobody is pushing to raise the retirement age to a level consistent with modern working conditions and health levels, there may be no way around that. But unless we’re going to substantially raise the payouts to wealthy retirees — which simply makes no public policy sense — it amounts to a simple money grab, further belying the notion that Social Security is a retirement account rather than a welfare system.