Fiscal Fact No. 148
Although the first debate was originally supposed to be about foreign policy, due to the current financial situation in the United States, the economy was the issue for the first half hour of the debate. In the economic portion of the debate, both Sens. Obama and McCain made some statements about taxes that played somewhat loose with the facts. Let’s take a look at a few of these courtesy of CNN’s transcript. We list Obama first as he went first during the debate. (That will be our policy for all debate analyses.)
Obama’s Gaffes
First, Obama made this claim, comparing his own 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 to Sen. McCain’s:
And in his (Sen. McCain’s) tax plan, you would have CEOs of Fortune 500 companies getting an average of $700,000 in reduced taxes, while leaving 100 million Americans out.
So my attitude is, we’ve got to grow the economy from the bottom up. What I’ve called for is a tax cut for 95 percent of working families, 95 percent.
Sen. Obama is mixing baselines here, and the three figures aren’t really comparable. First, the $700,000 in reduced taxes for CEOs comes from McCain’s extending of the lower tax rates that those CEOs benefit from, which were in place under the Bush tax cuts. So when Obama uses that number, he is citing it relative to a baseline that assumes the Bush tax cuts were repealed. But when he talks about the “leaving 100 million Americans out” figure for McCain’s tax plan, he is assuming that the Bush tax cuts were left in place with an AMT patch, too (and he ignores McCain’s health care 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. and 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). When it comes to the 95 percent who would get a tax cut under his plan, Obama includes the tax cuts that many relatively high-income ($100,000-$300,000) families would receive from an AMT patch, something he doesn’t give McCain credit for in the100 million figure, which only assumes McCain would increase the personal exemption.
Now this may seem like a technical and geeky point, but it’s really not. Obama is basically comparing apples and oranges, and thereby misleading the American people. It’s kind of like Obama telling you that the Georgia Bulldogs are 4-0 and the St. Louis Rams are 0-3 without telling you that the Georgia Bulldogs play college football and the St. Louis Rams play professional football. He is implying that the two figures are comparable measures of the quality of the tax plans, but in reality, they’re not.
Obama also said this:
[H]ere’s what I can tell the American people: 95 percent of you will get a tax cut. And if you make less than $250,000, less than a quarter-million dollars a year, then you will not see one dime’s worth of tax increase.
This statement is not entirely true. According to the Tax Policy Center, only 81.3 percent of tax units would receive a tax cut under Pres. Obama. The “95 percent of working families” figure mentioned earlier in the debate is fairly accurate, but it’s not 95 percent of the entire population. As for those making less than $250,000 not seeing a “dime’s worth of tax increase,” technically some households or tax units that benefit little from Obama’s individual tax cuts could pay more due to Obama’s closing of what he calls corporate tax loopholes, under the assumption that owners of capital would bear such a tax increase. This is not that significant a tax hike for those making under $250,000, but there are still some tax units or households making under $250,000 that could pay more in taxes under Obama’s plan. Also, if we count Obama’s windfall profits taxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance taxes and taxes levied on lottery winnings can also be considered windfall taxes on individual profits. and assume that was borne in the short run by owners of oil company stock, then some tax units that own a disproportionate amount of oil company stock, either directly through stock ownership or indirectly through a pension fund, could pay more in taxes, possibly exceeding the benefit that tax unit would receive from the energy “rebate” that Obama proposes to fund with the windfall profits tax money.
McCain’s Gaffes
McCain also provided some misleading information on taxes in the debate Friday night. The first instance was when he talked about his health insurance tax credit yet didn’t bother to mention that employer-provided health insurance benefits would be taxed. Obama was sure to point that out, and to his credit, he didn’t say it was a massive tax hike like running mate Joe Biden has done on the campaign stump.
McCain also made this claim about his tax plan:
I want to double the dividend from $3,500 to $7,000 for every dependent child in America.
When McCain uses the term “dividend,” he is referring to the personal exemption. It’s unclear where the word “dividend” came from, and he has made this error on multiple occasions throughout this campaign when he talks about this proposal publicly. (At least he didn’t say “credit” as he has done in the past.) But that’s not the issue here. McCain’s claim is misleading because he never really doubles the personal exemption.
The current personal exemption in 2008 for a dependent is $3,500. McCain’s plan calls for making it $7,000 by 2016 (eight years down the road). But even if McCain left it alone, the personal exemption would likely be near $4,600 in 2016 because most tax parameters are adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. annually (assuming average 3.5 percent inflation). Therefore, instead of increasing it by 100 percent (double), it is safer to say that he is increasing by around 50 percent. McCain is exaggerating by almost a factor of two. And even if this measure is passed, a $2,400 per child exemption increase in 2016 for a traditional family of four (two children) in the 15 percent bracket (truly middle-income) would save the family only $720, which is about $547 in 2008 dollars (again assuming 3.5 percent inflation). Many Americans who don’t understand the difference between an exemption and a credit may have thought they were going to save $3,500 more per child.
McCain also brought up his optional 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. plan, which is something that nobody analyzing his tax plan has really taken seriously because McCain doesn’t want the large revenue loss that would result from this measure counted against his overall economic plan. (In other words, the campaign wants it both ways, as Obama adviser Austan Goolsbee once said at an event comparing the two candidates’ tax plans: McCain can say one thing on the stump, but tell organizations like the Tax Foundation and Tax Policy Center something else when we score the lost revenue effects of his policies.)
Finally, McCain accused Obama of voting for tax hikes on people making as little as $42,000. That was a non-binding Senate vote earlier this year, and it’s different from what Obama is proposing as a candidate. Very few households making $42,000 per year would pay more in taxes under Obama’s tax plan. Some may say that Obama is voting one way and proposing something else on the campaign trail. If that’s fair, then McCain’s drastic change of heart on the Bush tax cuts is fair game as well. McCain voted against the 2001 and 2003 tax cuts, but now supports extending almost all of them with the exception of the full repeal of the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. .
Other Gaffes
Factcheck.org points out some other errors as they relate to fiscal policy:
McCain tripped up on one of his signature issues: special appropriation “earmarks.” He said they had “tripled in the last five years,” when in fact they have decreased sharply.
Obama mischaracterized an aspect of McCain’s health care plan, saying “employers” would be taxed on the value of health benefits provided to workers. Employers wouldn’t, but the workers would. McCain also would grant workers up to a $5,000 tax credit per family to cover health insurance.
McCain misrepresented Obama’s plan by claiming he’d be “handing the health care system over to the federal government.” Obama would expand some government programs but would allow people to keep their current plans or chose from private ones, as well.
Future Debates
The Tax Foundation will be doing the same fact checking on tax issues after each of the presidential debates, as well as next week’s vice-presidential debate. Unfortunately, this type of analysis is necessary because throughout this presidential campaign, honesty and true straight talk on tax issues from either side have been mostly nonexistent.
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