New McCain Ad: Obama Would Raise Taxes on Middle Class, Seniors, and Small Business

August 8, 2008

A new ad that is out from John McCain attacks Barack Obama for wanting to "raise taxes on the middle class," "raise taxes on seniors," and "raise taxes on small business." While I won't digress into the obvious question of why these three groups of people are any more important than others when it comes to tax policy, it's worth asking the question of how true this ad's claim is.

Like most political ads, the statements are technically true. Obama would raise some taxes on some seniors, on some small businesses, and some in the middle class. But regardless of how one defines "middle class" (assuming it doesn't include households making beyond $200,000), Obama's tax plan is basically to redistribute from those above that income level to those below that income level. You can call this good public policy or you can call this theft, but the fact of the matter is that Obama's tax plan (on net) is designed to lower the taxes paid by middle class households at the expense of higher taxes on upper-income households.

In the long-run, Obama's tax plan that increases taxes on upper-income owners of capital could lead to lower wages for the middle-class and deadweight losses that are in part borne by middle class families, but that amount is unlikely to offset the pure redistribution of dollars that is flowing from upper-income to the middle-class through his tax proposals.

With regards to seniors, Obama's tax plan actually favors exempting seniors from income tax making up to $50,000 in income, which is just stupid in my opinion, especially given that it would have to be phased-in and phased-out if ever put into real law, thereby exempting large portions of taxes of those seniors even making above that $50,000 figure. Ignoring the $50,000 senior exempion, Obama's tax plans that raise taxes on capital gains and dividends could directly affect seniors disproportionately more than other subgroups of the population, but the greater economic harm of dividends and capital gains is not that it just raises taxes on seniors but rather that it can lead to economic efficiencies and increases the double taxation of corporate income. (On the flip side, too much preferential rates for dividends and cap gains can have the side effect of tax planning where individuals try to make wage income appear to be capital income. Integration of the corporate and individual tax codes appears to be the ideal tax reform to mitigate this problem.)

And finally, McCain claims that Obama would raise taxes on small businesses. That is true given that a disproportionate number of small businesses are in the top two tax brackets and the fact that many would be hit by the payroll tax hike Obama has proposed. These could actually have the effect of luring some high-income small businesses into being corporations, everything else held constant. However, not all small businesses would be directly hit by this tax increase as many do earn less than $200,300 in taxable income which comes about to $250,000 in AGI for a typical married tax return.


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