Fact Checking the Tax Talk: Economic Policy Dominates Second Presidential Debate

October 7, 2008

The following is an analysis of the claims made by Senators John McCain and Barack Obama on the issue of taxes in tonight's second presidential debate in Nashville. Despite the town hall format, no off-the-wall questions were asked. (I was hoping somebody would ask the question that we at the Tax Foundation get asked all the time: "Do I really have to pay my income taxes?") Because no such odd questions were asked, the candidates largely stuck to their campaign scripts and used many of the same sound bites they've used for the past six months on the campaign trail. Unfortunately, many of those common talking points on tax issues often sound good, but are either factually incorrect or highly misleading, which is why much of the analysis below may sound like a repeat of the first presidential debate and the vice-presidential debate.

Once again, since Sen. Obama spoke first at the debate, I will start with an analysis of Sen. Obama's factual mistakes or misleading claims on tax policies. Transcript provided by CNN.

Obama's Errors

Early in the debate, Sen. Obama took a shot at the fiscal policies of President Bush:

But I think it's important just to remember a little bit of history. When George Bush came into office, we had surpluses. And now we have half-a-trillion-dollar deficit annually.

When George Bush came into office, our debt — national debt was around $5 trillion. It's now over $10 trillion. We've almost doubled it.

And so while it's true that nobody's completely innocent here, we have had over the last eight years the biggest increases in deficit spending and national debt in our history. And Sen. McCain voted for four out of five of those George Bush budgets.

First, on the issue of a surplus when Bush came into office, it's somewhat unfair to say that he inherited a surplus situation given that a recession began the month he took office. (The deficits of the recent years are another story.) Regarding the claim that we have had $500 billion deficits annually under Pres. Bush, that is not entirely true. The deficit for the fiscal year that was just completed (Sept. 30) was estimated to be $438 billion. However, the highest deficit of the seven years previous was $413 billion in FY 2004. The average deficit in that eight year period was $248 billion (which includes a surplus year of FY 2001) and the average deficit of the past four years has been $292 billion.

It is true that for FY 2009, the deficit will likely be astronomical and higher than $500 billion, but we have not had "half-a-trillion dollar deficits annually" under Pres. Bush. As for the debt rising from $5 trillion to $10 trillion, the starting point is closer to $6 trillion than $5 trillion (5.7) when Bush assumed office.

As for the claim that Sen. McCain voted for Bush's budgets, there are many parts of the budget that are voted upon each year. And actually, Sen. McCain voted against two of the major provisions that added to the national debt: the 2001 and 2003 tax cuts. (More on this later.)

On the issue of Sen. McCain's tax cuts, Obama said this about who would benefit:

Now, when Sen. McCain is proposing tax cuts that would give the average Fortune 500 CEO an additional $700,000 in tax cuts, that's not sharing a burden.

The $700,000 figure is only an "additional" tax cut for those CEOs if you do not count the Bush tax cuts that have already been put in place. Since those tax cuts are set to expire, that's a technically valid point. But this is somewhat misleading voters when he says "additional tax cuts" because it can be interpreted by many that those CEOs would be getting that much in tax cuts on top of the tax cuts they have received from the Bush tax cuts, which are set to expire on Jan. 1, 2011.

Responding to Sen. McCain's comments about tax policy, Sen. Obama made many claims about his tax plan and that of his opponent in rapid succession in this portion of the debate:

So let's be clear about my tax plan and Sen. McCain's, because we're not going to be able to deal with entitlements unless we understand the revenues coming in. I want to provide a tax cut for 95 percent of Americans, 95 percent.

If you make less than a quarter of a million dollars a year, you will not see a single dime of your taxes go up. If you make $200,000 a year or less, your taxes will go down.

Now, Sen. McCain talks about small businesses. Only a few percent of small businesses make more than $250,000 a year. So the vast majority of small businesses would get a tax cut under my plan.

And we provide a 50 percent tax credit so that they can buy health insurance for their workers, because there are an awful lot of small businesses that I meet across America that want to do right by their workers but they just can't afford it. Some small business owners, a lot of them, can't even afford health insurance for themselves.

Now, in contrast, Sen. McCain wants to give a $300 billion tax cut, $200 billion of it to the largest corporations and a hundred thousand of it — a hundred billion of it going to people like CEOs on Wall Street.

He wants to give average Fortune 500 CEO an additional $700,000 in tax cuts. That is not fair. And it doesn't work.

Obama stretches the truth on a few occasions in this portion of the debate. First, the claim that he would cut 95 percent of Americans' taxes is not true. Obama was basically correct earlier in the debate when he said that "95 percent of working families" would receive a tax cut. But according to the Tax Policy Center, only 81.3 percent of tax units in 2009 would receive a tax cut under Pres. Obama's tax plan. In summary, the "95 percent of Americans" figure is not correct for any year.

Regarding the claim that anyone who makes less than $250,000 won't see a tax hike under Obama, that is not entirely true. As I pointed out in the vice-presidential debate, Tax Policy Center estimates actually show that some tax units earning under $250,000 would see a tax increase, due to the fact that Sen. Obama does raise corporate income taxes, and all taxes are paid by people.

On the issue of small businesses, it is true that a small fraction of small businesses would actually face a tax hike under Pres. Obama. But as Sen. McCain tried to say but said technically incorrectly, the small businesses that would face a tax hike under Obama's plan to raise the top two marginal tax rates actually make up around half of small business income (McCain used the term "revenue," and it is unclear whether that's true or not, but let's assume he meant "income").

Later in the debate, Sen. Obama criticized Sen. McCain for voting 23 times against alternative fuels, many of which contained special tax provisions for various sectors. Like Sen. McCain's criticism of Sen. Obama's tax votes (see below), these statistics should be taken with a grain of salt given the complexities of the legislative process. Also on this issue, Sen. Obama said he would create 5 million new jobs in green energy. But any economist would tell you that many of those 5 million jobs would come at the expense of jobs in the old energy sector.

Sen. McCain's Errors

Like Sen. Obama, Sen. McCain repeated many of the same misleading statements on tax policy that he has made on the campaign trail throughout the campaign season

Early in the debate, Sen. McCain made it a point to complain about the $10 trillion national debt:

We obviously have to stop this spending spree that's going on in Washington. Do you know that we've laid a $10 trillion debt on these young Americans who are here with us tonight, $500 billion of it we owe to China?

If Sen. McCain is concerned with the national debt, his tax proposals do not show it. That's because over the next ten years, according to the Tax Policy Center, Sen. McCain's tax proposals would grow the national debt by over $4 trillion. He can't cut that much spending by just going after earmarks. (Sen. Obama also doesn't balance the budget under his tax plans and likely spending over the next ten years, according to TPC.)

On the issue of tax history, McCain made this statement to attack Obama's tax plan:

But he wants to raise taxes. My friends, the last president to raise taxes during tough economic times was Herbert Hoover, and he practiced protectionism as well, which I'm sure we'll get to at some point.

My friends, that depends upon your definition of "tough economic times." Pres. George H.W. Bush raised taxes in 1990, a period of stagnant economic growth. And FDR, who followed Hoover (take note, Joe Biden, if you are reading) in 1933, raised taxes throughout the 1930s and 1940s.

In that same portion of the debate, McCain also criticized Obama for frequently changing his tax plan. While it is true that many key parts of Obama's tax plan started off murky in this campaign and became clearer as the campaign moved on (payroll tax cap and capital gains, to name two), a similar problem is that Sen. McCain had different plans at different times of the day. Both he and Sen. Obama will say one thing on the stump and tell organizations like the Tax Foundation or Tax Policy Center something else. Sen. McCain does that with his rhetoric about how he would provide Americans with an alternative flat tax (a la Fred Thompson), as well as repeal the AMT, when in fact he would merely patch it. Furthermore, his position on tax policy has changed rather significantly given his opposition to the 2001 and 2003 Bush tax cuts, and now his support for the extension of those tax cuts plus many more tax cuts.

Throughout the debate, there appeared to be some uncertainty about Sen. Obama's spending proposals. Sen. McCain said at one point that Obama is proposing $860 billiofn in new spending, while Obama said he would actually cut spending on net. It's unclear as to who is correct, but one problem with Sen. McCain's statement is that even if the $860 billion figure was technically true, we don't know what time frame he is talking about (one year, ten years, etc.), and it also doesn't give Obama credit for any spending cuts that he may propose. (Obama has talked a lot about the Iraq war as a possible spending item that could be cut.)

Once again, Sen. McCain claimed that he would double the personal exemption for dependents from $3,500 in $7,000. In reality, Sen. McCain's plan wouldn't really double it as he plans to merely make it $7,000 by the year 2016. What he doesn't tell you is that the personal exemption would rise to somewhere between $4,500 and $5,000 due simply to the annual inflation adjustments that are automatic in the tax code. So in other words, it would be more accurate for Sen. McCain to say that he is increasing it by 50 percent as opposed to increasing it by 100 percent (i.e. doubling it).

On the issue of his health care tax credit, McCain said this:

And if you do the math, those people who have employer-based health benefits, if you put the tax on it and you have what's left over and you add $5,000 that you're going to get as a refundable tax credit, do the math, 95 percent of the American people will have increased funds to go out and buy the insurance of their choice and to shop around and to get — all of those people will be covered except for those who have these gold-plated Cadillac kinds of policies.

I'm not exactly sure where he obtains the "95 percent" figure, but it seems fairly accurate for the early years of his tax credit (i.e. 2009, 2010, 2011). But eventually, assuming his health care tax credit would be indexed to CPI-U as opposed to health care costs, that credit's value would decline, and the "95 percent" figure would fall. That being said, it is still a $1.3 trillion tax cut over 10 years, and McCain's own quote above regarding the 95 percent figure essentially proves that Gov. Palin was incorrect in the vice-presidential debate when she claimed that the health care tax plan was "budget neutral." You can't give that many people increased funds and have it "budget neutral."

Finally, McCain also repeated one of his most frequent attack lines on Barack Obama:

Now, just back on this—on this tax, you know, again, it's back to our first question here about rhetoric and record. Sen. Obama has voted 94 times to either increase your taxes or against tax cuts. That's his record.

As I pointed out earlier, these types of statistics should be taken with a grain of salt by voters. It's also funny that he would criticize Sen. Obama for voting against tax cuts when Sen. McCain voted against the two biggest tax cuts of the past twenty years (2001 and 2003 Bush tax cuts).

Final Debate is Next Wednesday (Oct. 15)

The final debate will be eight days from now, and we will provide a tax fact-checking analysis of that debate as well. Beyond that, this blog will continue to monitor the rhetoric we hear on tax issues in the advertisements coming from both campaigns, as well as independent organizations.


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