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Obama, McCain Keep up the Misleading Talk on Taxes as Election Day Approaches

4 min readBy: Gerald Prante

The misleading ads and speeches from both John McCain and Barack Obama continue, and they will likely continue through Tuesday. Here's Obama's latest ad on taxes:

Obama: I'm Barack Obama and I approve this message.

Announcer: "Wonder where John McCain would take the economy? Look behind you. John McCain wants to continue George Bush's economic policies. As President he'd provide no taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. breaks to 101 million Americans but keep tax breaks for companies that ship our jobs overseas.

He wants $4 billion dollars in new tax breaks for big oil. And would tax your health benefits for the first time ever. Look behind you. We can't afford more of the same.

Once again, the 101 million Americans "won't benefit" figure is true only under certain assumptions, including ignoring Sen. McCain's patching of AMT, ignoring Sen. McCain's health care plan, ignoring Sen. McCain's corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. cut, and under an assumption that Americans = tax returns, and that you're referring to a current law baseline for 2009. But what makes this assumption ridiculous is that when Obama talks about his own tax plan, he will take credit for his patching of the AMT and consider that as part of his tax cuts for those making less than $250,000.

As for the tax breaks for "big oil," once again it's misleading. John McCain's tax plan would lower the corporate income tax rate from 35 percent to 25 percent. But that would apply to all companies, whether they produce cookies or oil. Also, people pay all taxes, even if a company legally remits the check to the government.

And on the issue of taxing health benefits, once again, he doesn't tell you the whole truth. Sen. McCain's plan would subject health insurance to the income tax, but people would receive a tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. that in the near term would far outweigh any tax hike for most taxpayers (especially lower- and middle-income taxpayers who would actually fair better on average under Sen. McCain's health care plan than Sen. Obama's, per Tax Policy Center).

Now let's go to the McCain camp's misleading rhetoric on taxes in his new "Compare" ad:

Your choice… for higher taxes … for workin' Joes. Spread your income … keep what's yours. A trillion in new spending … freeze spending, eliminate waste.

First, Sen. McCain claims he would freeze spending, but his new refundable health care tax credit would cost $1.3 trillion over 10 years, some of which is legally classified as a spending program because it's refundable. (And really, all of it is basically equivalent to a giant spending program albeit an improvement over the current implicit spending we do now for healthcare via the tax code's exclusion for health insurance benefits.)

The ad also says Sen. Obama is for higher taxes. It's true that relative to a current policy baseline, Sen. Obama would raise overall taxes. However, most taxpayers would actually receive a tax cut under Obama even if you accounted for any possible harm to economic growth effect that those at the bottom would face due to Sen. Obama's higher taxes on the investments of those at the top.

Now you may call this "spreading the income," which much of it really is and debate whether they're really "tax cuts" and get into that discussion of refundable credits being tax cuts if they have a payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. and all that. But at the end of the day, it is indeed redistribution and that's what it should be labeled given that a public good in these refundable credits appears to really not exist except for the possible public good of redistribution itself.

But it's not as if Sen. McCain doesn't favor any redistribution. As mentioned earlier, his refundable healthcare credit would spread income relative to the current baseline. (I think it's an improvement, but it's still government redistributing income relative to initial market income.) Also, given that much of Sen. McCain's plans are financed by higher long-term debt, one could call that spreading the wealth across generations. (If you believe in Ricardian-Barro equivalence, then he's not spreading the wealth across generations but then again he's not cutting taxes either under that assumption.). And if Sen. McCain doesn't believe in redistribution (assumes its public good value is zero), then he needs to implement fundamental tax reform unless he assumes that the current distribution of the federal tax burden is aligned with the benefits of government spending. That's because even under a pure flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. , there would be redistribution if the benefits of government spending didn't align with income.

In closing, it's sad that we've come to expect a campaign that is merely debated in sound bites and demagoguery where something that takes more than 10 seconds to explain isn't worth explaining.