Debate Tonight: Will the Real Truth Come Out on Anything?

October 15, 2008

Through their advertisements and in their first two debates, Sen. Barack Obama and Sen. John McCain have bickered over two tax policies most frequently: Sen. McCain's health care tax credit and the impact of Sen. Obama's tax plan on small businesses. Unfortunately, on both issues, neither campaign has been telling the American people the whole truth. Both issues will undoubtedly come up again in tonight's presidential debate, so I present below a reality check on the two matters.

Sen. McCain's Health Tax Credit

Sen. McCain proposes a new refundable health tax credit for each tax return — $2,500 for singles, $5,000 for a couple. To pay for part of this major tax cut, he proposes that the current tax exclusion for employer-provided health insurance be repealed. For 2009 and many years to come, the new credit would be more valuable to most taxpayers than the current exclusion, which for the typical taxpayer is now worth about $1,800. The Obama campaign has been running advertisements that are far from honest, and the McCain campaign rarely tells voters the whole truth either.

The vice-presidential debate was a font of falsehoods on this topic. Gov. Sarah Palin claimed that the plan was budget neutral when, in fact, the McCain plan would be a large tax cut, roughly $1.3 to $1.4 trillion over ten years. That tax cut figure may surprise people who believed Sen. Joe Biden's statements on the campaign trail that falsely called it the largest tax increase ever on the middle class. In fact, the Urban-Brookings Tax Policy Center estimates that Sen. McCain's health tax credit would actually be a better deal for the middle-income (as a group) than Sen. Obama's health plan for each of the next ten years.

Obama has also been running ads trying to scare voters into believing they would be left to pay higher wage taxes while their insurance companies collect the tax credit. In fact, a taxpayer's insurance company would only receive the credit as total or partial payment of the insurance premiums that the taxpayer owes for health insurance. It's like the government giving you a voucher for cable television service, yet sending the check directly to the cable company on your behalf. The cable company can only cash the voucher if they provide you with the service. So the voucher is benefiting you, not just the cable company.

The Impact of Sen. Obama's Tax Plan on Small Business

Sen. McCain has been quick to point out that Sen. Obama's tax increases (most notably those in the top two income tax brackets) would hurt small business. Sen. Obama has responded that his tax plan would only affect a small fraction of small businesses. So who is right? Well, it depends.

While Sen. Obama is technically correct to point out that only a small fraction of small businesses would be hit by his tax hikes, that's not really a relevant statistic on this matter. Assuming taxes on small business activity are especially important, we need to answer the question, "How much would each candidate change the taxation of business-source income?" And the answer to that question is that Sen. Obama's tax hike would not be minor.

Also worth noting is that in the previous debate, Sen. McCain was technically incorrect when he said that Sen. Obama would raise taxes on over 50 percent of small business income. True, tax returns with small business income that have some of their income taxed at the top two marginal rates would pay more, and they make about 56 percent of small business income. But even among those businesses, much of their business income is being taxed at lower rates currently in law that would not change under Sen. Obama's tax plan.

Overall, both sides aren't telling the voters what matters for small business. Sen. Obama's claim that only a small fraction of small businesses would be directly hit by his tax plan is misleading the public into thinking his tax hikes for small business would be trivial. From an economic perspective, the disproportionate amount of small business income earned by those firms make the tax hike non-trivial. Meanwhile, Sen. McCain is overstating how much small business income would be affected by Sen. Obama's tax plan.

Summary

For the past six months, the two presidential campaigns have stooped about as low as they possibly could on tax policy. Voters are lucky if they get even a half-truth from either candidate. There has been no straight talk, and if this is change, I want my money back.

In all likelihood, the misinformation campaigns will prevail not only for the rest of this campaign but for the entire 2012 campaign. And so I would like to suggest that the Commission on Presidential Debates take a lesson from the National Football League. Give each candidate two challenges during the debate. If one candidate made a claim that his opponent considered false, he could hit a buzzer, and a panel of experts from organizations like CQ, factcheck.org, etc. would take a minute to review it (commercial break time for networks). If the challenge is successful, it doesn't count against the candidate's two-challenge limit.


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