The Tax Policy Center
2008-07-09 07:00:00.0
Current rank: Not ranked

WASHINGTON -

The two candidates’ plans would have sharply different distributional effects. Sen. [John] 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, Sen. [Barack] 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.

The impact of the tax code on economic activity under each candidate’s policies would differ in several important ways.

Under Sen. McCain’s proposed policies, the top marginal rates (35 percent on individual income and 25 percent on corporate income) would be significantly lower than under Sen. Obama’s plan (39.6 and 35 percent, respectively). McCain’s reduced individual and corporate rates could improve economic efficiency and increase domestic investment, but the larger future deficits would reduce and could completely offset any positive effect.

In contrast, Sen. Obama’s proposed new tax credits could encourage desirable behavior, particularly if the childless earned income tax credit 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.

Read more at urban.org.