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Just the Facts: A Comparison of the McCain and Obama Tax Proposal

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As we get closer to the election, more and more people are talking about it, and specifically the candidate’s tax plans. Sadly, I believe the vast majority of people complaining about one plan or the other have never actually read the either candidate’s proposal.  I’m getting a little sick of “Obama wants to destroy America’s economy” and “McCain is going to steal from the poor and give to the rich” MySpace and Facebook posts. So I thought it might be helpful to present a comparison of the two tax plans. I’m going to use information I read in Senator John McCain’s plan and Senator Barack Obama’s plan. I will also use New York Times’ helpful issue comparison.  I’ll try to present just the facts, and let you make up your mind.

Tax Cuts for Individuals

Senator Obama wants to immediately cut taxes for households making less than $250,000 a year. He proposes $500 for individuals and $1000 for families. He has a number of other tax cuts and credits he wants to implement.  He wants to eliminate all tax for seniors making less than $50,000. He wants to offer a 10% tax credit on mortgage interest to those who do not itemize.  He wants to offer a $4000 tuition expense tax credit.  Obama also wants to simplify taxes, so taxpayers don’t have to pay for tax-preparation.  Senator McCain wants to increase the exemption for dependents $500 per year until it is up to $7000 a dependent in 2016. He also proposes an insurance tax credit; $5000 per family and $2500 per individual.

For those in the highest income brackets, Obama wants to rescind the Bush tax cuts for households earning more than $250,000. He would return the top two income tax brackets to 35% and 39.6%. Senator McCain wants those tax cuts to be permanent, and to keep the top tax rate at 35%.  He also wants to get rid of the Alternative Minimum Tax. 

Capital Gains

Obama wants to increase the capital gains tax from 15% to 20% for households making more than $250,000. McCain supports reducing the tax to 7.5 percent for two years, but leaving it at 15% overall.

Business Tax Cuts

For small business Obama’s plan is to remove capital gains tax on start up and small businesses.  He wants to give businesses a $3000 tax credit for each new employee hired in 2009 and 2010. Through the end of 2009 Obama proposes allowing small businesses to write off investments up to $250,000. Obama also wants to offer a refundable tax credit of up to 50% on insurance premiums paid by employers for their employees. McCain supports allowing first year deducting of equipment and technology investment.

Corporate Tax Cuts

For corporate tax rates Obama says he wants to close “corporate loopholes” before considering a cut.  He wants to reward those corporations who create more American jobs with tax cuts. He also pledges to “eliminate special tax breaks for gas and oil companies.”  McCain wants to cut the corporate rate from 35% to 25% by 2015.

Additional McCain Cuts

There are additional tax cuts McCain wants to make. He wants to ban Internet and new cellphone taxes. He wants to establish a permanent tax credit equal to 10% of wages for research and development.  McCain also wants to make it harder to raise taxes by requiring a 3/5ths vote in Congress.

Reading Into the Plans

There are a few things that may not be immediately obvious looking at both of these plans. Obama does not define what amount of income a company needs to make to be considered a small business.  A lot of people are wrongly thinking that the tax will be raised on small businesses making more than $250,000 a year.  They may be confusing two things. One is the individual tax rate hike he is proposing for those who make over $250,000 or his support of allowing wages above $250,000 to be subject to a payroll tax.  I’m not sure exactly what that means but it’s possible that under his plan small business owners who pay themselves over $250,000 a year will be subject to a tax increase twice. His plan is unclear on the tax rates of small businesses that make over $250,000 a year, and whether they would be eligible for any or all of his proposed tax credits.

For McCain he does not actually promise any tax cuts for the middle class, just tax credits and an increase in the exemption amount.

Paying for the Cuts

The total cost of McCain’s plan is $352.5 Billion. The total cost of Obama’s plan is $175 Billion. McCain plans to pay for the tax cuts by eliminating earmarks, implementing a one year spending freeze, and overhauling Social Security and Medicare. Excluded from the spending freeze would be veteran’s benefits and defense.  McCain also promises to review all government programs and then “modernize, streamline, consolidate, re-prioritize, and where needed terminate individual programs.“  Obama plans to pay for the tax cuts by reduced spending. Specific examples include ending the war in Iraq, limiting payments to high income farmers and Medicare HMO’s, and ending no-bid contracts.

Conclusion

It is one of the classic democratic versus republican debates. The Republican wants to cut taxes for businesses, which makes its easier to do business, which creates more jobs, which is better for everyone. This is sometimes referred to as the “trickle-down” effect.  The Democrat wants to cut taxes for the middle-class and regulate business more, which creates more people spending money, which will create more jobs. This may be referred to as the “share the wealth” effect. Personally, I can’t say which is a more valid approach, and don’t think we’d find out unless we had two parallel Americas running at the same time. It’s an argument that’s been going on for years and isn’t going to stop after this election.

I just hope people can see past partisanship and realize that both candidates want to help America and make it stronger economically. They are aiming for the same goal; they just want to take different paths to it. As voters, we should know what they are proposing, and not just trust what someone else tells us about their economic plans. Go find out for yourself so you can make an informed decision on November 4th.

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About Mark Kalriess

  • Cindy D

    Mark,

    You haven’t said anything about McCain’s taxing health care premiums. This is a very important point to examine.

    McCain has proposed new health insurance tax credits, which his campaign estimates to cost $3.6 trillion over the decade. He says he pays for it by taxing workers’ health benefits, which are largely tax-free today. McCain aides say the plan has no net cost and left it out of their budget plan.

    McCain’s numbers add up only by raising taxes on middle-class families. To raise $3.6 trillion by taxing health benefits, you need both income and payroll taxes. But that means an $1,100 tax increase on a typical married couple earning $60,000 in 2013.

    Alternatively, McCain could avoid tax increases by applying only income taxes – but not payroll taxes – to health benefits. And this is what his spokesman told the Daily Tax Report he does. But income taxes alone fall $1.3 trillion short of paying for his tax credits.

    McCain aides say they pay for their health care plan without raising middle-class taxes, but that’s not possible. So which is it? Do they raise taxes on ordinary families by more than a thousand dollars or add $1.3 trillion to the deficit? It may be the biggest unanswered question in the candidates’ fiscal policies.

  • http://blogcritics.org/ Phillip Winn

    Pretty nice writeup, Mark. I agree that this is really the age-old dispute over a liberal vs conservative approach to taxation.

    Sadly, I doubt this will ever be truly resolved, but it’s interesting to see things lurch and back and forth somewhat with successive administrations.

  • Cindy D

    Mark,

    Could you elaborate on this point? Or rephrase it? I want to be sure I understand what you mean.

    I’m not sure exactly what that means but it’s possible that under his plan small business owners who pay themselves over $250,000 a year will be subject to a tax increase twice.

    As far as what constitutes a small business, that is defined by the Small Business Act:

    What is Small Business

    Table of Small Business Size Standards

  • http://theentertainmentcenter.us/site/ Mark Kalriess

    Thanks for all the comments everyone.

    I really tried to concentrate the article on just the tax cut proposals. I didn’t want to get into either healthcare plan at all, because then it’s a whole different article about the comparison of economic plans as a whole.

    Cindy,
    I don’t quite understand the issue, but Obama has said he would subject a payroll tax to wages over $250,000. He also wants to raise the tax on individual income over $250,000. So if a small business owner paid himself over $250,00 he could conceivably see a tax hike twice. But like I said don’t really know if that’s how it works.

  • capitalist

    Ignore Cindy..she is so high on left wing koolaid..she has cannot comprehend that Obama could be wrong on even one issue.
    It happens..people get so enamoured with a fake messiah they cant see straight.

  • Cindy D

    Another thing that I take into consideration is how each candidates tax cuts are going to be paid for. What effect will they have on the deficit? And does their plan pay any attention to that.

    Both candidate’s plans would result in increases in the deficit. Obama states that his increases in spending would be balanced by decreases in other areas, like the Iraq war for one. McCain doesn’t address the fact that his health care plan needs to be paid for. He also claims to be able to balance the budget by 2013. A claim experts say is dubious. Obama makes no such claim.

    SEE NYT Article: Mr. McCain’s plan would appear to result in the biggest jump in the deficit, independent analyses based on Congressional Budget Office figures suggest. A calculation done by the nonpartisan Tax Policy Center in Washington found that his tax and budget plans, if enacted as proposed, would add at least $5.7 trillion to the national debt over the next decade.

    How does McCain address this issue? McCain seems to have made some comments that suggest tax raises may be needed. He waffles back and forth with nothing that I can see that explains how he’s going to do what he says.

    It’s great to claim you’ll cut people’s taxes, it’s another thing to borrow money to do that. McCain has changed his tune somewhat on his old “look me in the eye, I will not raise your taxes.” His line after that (among other things he said) suggested he will merely go into any “negotiations” and support not raising taxes.

    See: Once More, With (a Little Less) Feeling

    It is comforting to know that Obama was endorsed by former Clinton senior adviser Rahm Emanuel. The man who suggested Bill Clinton should make balancing the budget a focus. It is also comforting to know Obama seeks out the brightest for advice, like the Clinton team that increased wealth during Clinton’s administration, and stock market expert Warren Buffet (who also endorsed Obama).

  • Lumpy

    mccain’s proposed tax on health insurance benefits is meaningless because under his proposal companies would stop paying for health insurance and workers would pay their own way with the cost offset by a tax credit. it’s a great free narket way to put peiple back in comtrol if their healthcare and put pressure on insurers to be more competitive. it’s a brilliant idea that puts people back in control and comes very close to providing national healthcare with a market aproach.

  • moon

    If I read one more fatuous reference to koolaid, I will be forced to sue this site for allowing assault on the sensibility of posters.

  • http://www.sitejabber.com Jeremy

    I just read a interesting article on why it might not make a lot of sense for either candidate to treat small businesses differently than large businesses.

  • Cindy D

    Lumpy,

    Most health care insurance premiums are currently tax-free. That means when your employer pays and you pay through your employer, you don’t pay income tax on your premiums.

    If you read what I posted in #1 you will see that, you are incorrect. You will find opinions from EXPERTS. I don’t make this stuff up. You might even consider investigating the matter on the chance that you may be wrong.

    What the analysts say about McCain’s health plan:

    The cost of insurance could go down for businesses with mainly younger, healthier workers, but companies with older or sicker workers would see costs rise or may not be able to find coverage at all, according to an Urban Institute analysis.

    Healthy individuals would see lower costs, while older or sicker people would see prices rise, says a Congressional Budget Office analysis of a similar 2005 proposal to allow insurers to sell across state lines. About 4.6 million more people would gain coverage by 2013, the Urban Institute and Brookings Institution Tax Policy Center say. The tax credit amount could cover the cost of an individual policy for young and healthy workers but would be unlikely to do so for older or sicker people, the Lewin analysis says.

    In other words, it sucks, AND is expensive to the government to boot.

    Also, and this is a big also: Insurers would not be required to take people with health problems.

    All quotes from here.

  • Clavos

    Most health care insurance premiums are currently tax-free.

    Not so, Cindy.

    Only if they exceed (along with all your other out-of-pocket medical expenses, including mileage and parking) 7.5% of your AGI, and even then, you can only deduct that part of them that are in excess of 7.5%, so if you had a total of 8%, you can only deduct 0.5%.

    From the IRS website:

    What Are Medical Expenses?

    Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include dental expenses.

    Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

    Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract…You can deduct only the amount of your medical and dental expenses that is more than 7.5% of your adjusted gross income (Form 1040, line 38).

    I’m an expert on this. In 2007, I had (including the premiums) $30K worth of out-of-pocket medical expenses, because of my wife’s illness.

  • Cindy D

    Clav, you are talking about medical expenses. I am talking about healthcare premiums through an employer.

    In other words, your employer (unless s/he is an idiot) sets up a plan that deducts your portion of your premium from your check PRIOR to the portion that is taxed.

    Nothing to do with and no relation to medical expense deductions.

  • Cindy D

    Please ask your employer to be sure they have set up the plan that is necessary to achieve this. Some small business owners do not know about it (unless they use a payroll service).

  • Cindy D

    Yes Clav, you would include your insurance premiums in your total medical expenses. That does not mean you paid taxes on your premiums!

    I am sure you are an expert regarding medical expenses.

    I am an experienced in what employers need to do with their employee premiums. Are you an employer?

  • Cindy D

    The insurance premiums that are taxed are the ones you get as an individual. That is, you don’t buy insurance through a(n) (knowledgeable) employer. There is no hope for you with the current administration. If you have to find your own insurance because your employer has no plan at all. You pay taxes on your premium.

    Lovely isn’t it? Don’t get a benefit? Get fucked twice over.

  • Clavos

    If your employer does that, it’s illegal, Cindy.

    Read what I quoted from the IRS site. Health insurance premiums paid by you are only deductible if they add up to more than 7.5% of your AGI.

    When your employer deducts your portion of your insurance premium from your paycheck, it’s deducted after the taxes are calculated. You can then deduct them from your return as I outlined above.

    Again from the IRS site cited above:

    Bill and Helen Jones belong to a group medical plan and part of their insurance is paid by Bill’s employer. They file a joint return, and their adjusted gross income is $33,004. The following list shows the net amounts, after insurance reimbursements, that Bill and Helen paid this year for medical expenses.

    1.

    For themselves, Bill and Helen paid $375 for prescription medicines and drugs, $337 for hospital bills, $439 for doctor bills, $295 for hospitalization insurance, $380 for medical and surgical insurance, and $33 for transportation for medical treatment, which totals $1,859.
    2.

    For Grace Taylor (Helen’s dependent mother), they paid $300 for doctors, $300 for insulin, and $175 for eyeglasses, which totals $775.
    3.

    For Betty Jones (Bill’s dependent sister), they paid $450 for doctors and $350 for prescription medicines and drugs, which totals $800.

    Bill and Helen add all their medical and dental expenses together ($1,859 + $775 + $800 = $3,434). They figure their deduction on the medical and dental expenses part of Schedule A, Form 1040, as shown.

    There’s more, but that illustrates my point.

  • Maurice

    Mark,

    well written. Thanks for a good article.

  • Cindy D

    Clav,

    I AM THE EMPLOYER!!!

    It’s not my employer. It’s ME! And my payroll company has set up the necessary plan to have my employees not pay taxes on their portion of their premium contributions.

    I learned about this because we used to use PayChex (for about 10 years) which did not charge taxes on the employee part of the premium but also did not set up the necessary plan that would allow us to make the employee portion non-taxable.

    We switched to ADP because they made us aware of this.

  • Cindy D

    “Under current law, the value of employer-provided health benefits is tax-exempt. But when individuals buy insurance on their own, they must pay for it with after-tax dollars. This amounts to a taxpayer subsidy for employer-sponsored insurance.”

    See this link.

  • Cindy D

    Clav, you need to take the largest payroll companies in the nation and tell THEM they’re wrong.

    I go by what THEY tell ME.

  • Clavos

    Cindy,

    I understand what you’re saying now. However, those premiums paid pre-tax are not deductible, and cannot be counted toward a medical expenses deduction on your Schedule A.

  • Cindy D

    Clav,

    Thanks for telling me that. I thought they could be deducted. That is good to know.

    In case I can ever can afford to pay my employees more, then, I will have them contribute to their insurance again. And that will require I do the same.

    This is the first year I will be claiming medical expenses. But, for 3 years I haven’t been able to raise my employees pay, so I paid for their share of the insurance instead, which includes mine. Which means my insurance is also wholly paid by the business. So, all of our insurance premiums are a business expense. I know I cannot claim anything there personally.

    But, just to confirm, you are saying that if employee A has insurance from my company and she were to pay $25/week and I as employer were to pay $50/week. She could not claim that $25/week in her medical expenses?

  • http://www.republicofdave.com Dave Nalle

    As I understand it what McCain is proposing is not a deduction but a tax credit, which is significantly different and has a much more profound impact on your taxes.

    Currently there is a deduction for health insurance premiums, but all it does is reduce your taxable income by the premiums paid up to a set limit per sperson.

    A tax credit is much better than this because rather than reducing taxable income it reduces taxes due directly. That’s about a third more real value for the average taxpayer.

    Dave

  • Cindy D

    By the way, just to enlighten those of you who do not understand how much “good” insurance actually costs. For a single individual in the lowest plan available in NJ would cost $275 or so/month. That is $3300/year with the lowest cost plan available from ANY carrier. It could leave any of my employees (or me for that matter) in dire financial straights if they ever had a disaster. As it requires very high copays and hospital deductibles and only pays 50% prescription benefits.

    I have gone with a plan this year that costs $310/single ($3720/year). It’s actually, a little more than twice that for married couple (for some reason). The plan lowers prescription costs. The hospital deductibles are still the same and are outrageously expensive.

    So, if McCain said he would give me a tax credit of $2500 and then charge me income tax on my premiums I would have to say, “Go fuck yourself.”

  • Cindy D

    Good insurance (insurance that insures you won’t be left owing $10-15,000 in hospital charges, and provides you with reasonable prescription coverage, costs in the neighborhood of $7000/year or more for a single even with employer group rates in NJ.

    Notice I didn’t say Cadillac policies with cosmetic surgery coverage. Just reasonably good insurance.

  • Cindy D

    For a small employer of under 20 emplyees.

  • http://www.republicofdave.com Dave Nalle

    So, if McCain said he would give me a tax credit of $2500 and then charge me income tax on my premiums I would have to say, “Go fuck yourself.”

    Keep in mind that NJ has some of the highest insurance rates in the nation. And I think the intent of the $2500 figure is for the government to underwrite most but not all of your insurance the way many employers do now.

    And you don’t pay income tax on the premiums YOU pay, you pay income tax on premiums paid for you by your employer.

    The idea of this system is clearly that employers would stop providing insurance for employees altogether and employees would provide their own insurance out of money that would otherwise go to their taxes, effectively making the state the payer.

    I think in the model scenario the employer stops paying $3000 or so a year for your insurance, bumps your salary up by about half of that, and you then pay $3000 for your insurance (less if the system causes rates to drop), of which $2500 is covered by a tax credit.

    Dave

  • jamminsue

    I tried to get insurance for a small group in Nevada and because my husband has medical conditions and we are in our 50’s, the cost would have been over $700 PER PERSON PER MONTH, for the four people in the plan it would have been $33,600/year. This plan had over $5,000 deductible and high copays. And, as my husband did not have a COBRA, he is not eligible for the state pool insurance, which if he had, would have been almost $900 per month. Thank goodness for UNLV who has a medical insurance plan for it’s students, otherwise we would be without insurance, bankrupt and homeless.

  • Clavos

    I’m paying in a LARGE group policy, which my wife gets through her employer, $850/month, with nothing paid by the employer because my wife is disabled and not working. It’s a VERY top drawer policy (but no cosmetic surgery), a PPO, not an HMO, and it’s covering us well, with low deductibles.

    Re your question in #22, Cindy:

    No, your employee can’t claim the deduction if her share of the premium is being paid pre-tax. Even if not paid pre-tax, health insurance premiums are only deductible when the total of medical expenses, including insurance premiums, exceeds 7.5% of the taxpayers’ AGI, and then the only part that’s deductible is that which is in excess of the 7.5%. So if $1,000 is your 7.5% threshold, and you had $1,200 in total expenses, only the $200 above the $1,000 would be deductible.

  • Cindy D

    Dave,

    I am too tired to figure out what you said. Still, I am not so tired to not be able to sense that there is something not quite right there.

    But (yawn), tomorrow is another day bubbale :-)

    And remember that is boo-bah-lah (as my grandma used to say it). Not Boo-bah-lay.

    Nor is it Bubba…which, as far as I am concerned, sounds like a guy who drinks a lot of beer, watches pro-wrestling with a passion, has a high-school equivalency degree or less, and needs to pull up his pants so as to remain discreet.

    My mother, upon moving to Virginia, saw a pick-up truck with a hand made business sign for yard work that said: Bubba, Bubba & Tyrone’s Yard Service. I shortly thereafter opened an account with a bank near her called BB&T Bank. I am happy to say, they did not have a hand made business sign.

  • Cindy D

    Thanks Clav.

  • http://www.republicofdave.com Dave Nalle

    Yes, Cindy. ‘Bubba’ certainly denotes a ‘regular guy’, but down here in Texas being a regular guy is seen as a good thing, not something to be looked down on.

    Dave

  • bliffle

    jamminsue reports:

    “Thank goodness for UNLV who has a medical insurance plan for it’s students, otherwise we would be without insurance, bankrupt and homeless.”

    It’s shocking that so much of our ability to navigate between survival and failure depends on The Luck Of The Draw. But it illustrates the extent to which the Masters Of Society have succeeded in socializing risk while privatizing profits. All the risks of modern life have been pushed down to the lowest levels, while rewards are scraped off at the top even before any profits are realized.

    Even more shocking is that so many Americans think it is an acceptable outcome that people should lose their savings and their homes and become homeless because of the unlucky combination of a medical calamity and high medical costs.

    IMO we are long past the point where we need a Universal Healthcare System.

  • Cindy D

    Dave,

    I have no real problem with “regular guys” or “regular gals”. Some “regular” people aren’t even narrow minded despite that their thinking is often uniformed.

    As long as they don’t try to hold high office to impose their “regular” standards on everyone else, they’re fine with me.

    My grandma was a “regular” gal of Pennsylvania coal-miner stock. Uneducated and always in awe of this “they” that said how things were when she read the paper. She was a warm, loving person. She had a lot of good things to teach me. Not every lesson can be gleaned from the world of information. Nevertheless, I wouldn’t want her running for president. Or Vice President, for that matter.

  • Ms. Know

    The bottom line with the tax issues is that you can’t force our small businesses to close. If the Ivy-League illuminati want to share the wealth, share their wealth. But causing small businesses to close, will damage this economy, if it can get any worse.

  • Jennifer

    I was looking for something else and really want to make sure Cindy gets clarification on the 250K being taxed 2xs question. No the business owner that pays himself 250K would have a tax write off through payroll so that income to the business would not be taxable.

    To your second comment about the tax exempt health deductions. Smart move. Also can be set up for any other healthcare/insurance including dental and disability policies such as AFLAC.

    However; to clavos reading for individuals and not a business, if an employer doesn’t offer the deductions as tax exempt the employee can claim the amount when they file their year end income taxes. Many people do not itemize and miss this deduction giving more money to the government than necessary. Check with your employer to get it set up. The administrator can easily get the agent to do this for them.

    Jennifer

  • Cindy D

    Jennifer,

    Thanks for that clarification on the double tax question. That makes perfect sense.

    By the way, is that “premium expense”(paid by an individual) deductible separately from the “medical expense” deduction that requires one spend whatever outrageous amount before medical expenses can be deducted?

    I.E. can you deduct your premium expense as an individual even if you don’t qualify for the “medical expense” deduction?

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