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Would Obama Tax Your Life Savings?

2 min readBy: Gerald Prante

A new John McCain ad out makes this claim:

I know your life savings have been hit hard, but we'll rebuild them.

Barack Obama wants to increase taxes on your savings.

You can't afford that.

He's quite a talker.

But that's just bad judgment.

So would Obama increase taxes on your savings? Maybe. In terms of direct taxA direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax. increases on your savings, Obama's 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. plan (as stated now) would likely not increase your taxes on savings if you make less than $250,000. That's because he favors keeping the lower income tax rates on both ordinary income (interest) and dividends and capital gains for those in the bottom four income brackets. Now it is true that a disproportionate amount of income derived from savings would be taxed given that Obama seeks to raise the rates on those who earn a disproportionate amount of the income from savings.

But there are the indirect effects on your savings as well from other tax changes that Sen. Obama is proposing. Raising taxes on capital gains or dividends on upper-income individuals could have an adverse effect on those who hold savings yet don't directly face the higher rates. Maybe the fact that he raises taxes on a large fraction of business income taxed in the individual code could adversely affect the savings of those not in the top two rates. However, by this argument of economic incidence in a general equilibrium setting, the McCain campaign is inconsistent because it keeps pointing out when attacking Obama's plan that many of those in the bottom don't pay any income taxes. If these lower-and-middle income people would bear any burden from higher taxes on businesses and higher taxes on those at the top, then they are actually paying some of the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , albeit indirectly through lower wages and lower returns to savings.