Vice-Presidential Debate: Plenty of Errors in Tax Policy Rhetoric

October 2, 2008

The first part of tonight’s vice-presidential debate between Sen. Joe Biden and Gov. Sarah Palin focused heavily on the issue of taxes. Unfortunately, like the first presidential debate, both candidates played loose with the facts. Even worse is that Sen. Biden and Gov. Palin made some of the same exact errors that their running mates made in the first debate that we pointed out this past Saturday. It’s becoming increasingly evident that the campaigns either don’t care about being accurate or are intentionally deceiving the American people on the issue of tax policy, which is complex in the first place. This report once again makes clear the distinction between reality and what the candidates are telling the American people about taxes.

Since Sen. Biden spoke first during the debate, we will address his gaffes first. Sen. Palin’s gaffes follow. Transcript courtesy of CNN.

Sen. Biden’s Errors

First, Joe Biden responds to a charge by Gov. Palin, who said that Sen. Obama voted to raise taxes on people making as little as $42,000. We’ve been over this numerous times, and while Sen. Palin’s claim is misleading (see below), Sen. Biden’s response contained an error as well:

The charge is absolutely not true. Barack Obama did not vote to raise taxes. The vote she’s referring to, John McCain voted the exact same way. It was a budget procedural vote. John McCain voted the same way. It did not raise taxes.

While Sen. Biden is correct to say that the vote did not raise taxes, actually, Sen. McCain did not vote on this non-binding resolution. It passed 51-44, but Sen. McCain was one of five members of the Senate who did not vote in that roll call vote. Therefore, Sen. Biden’s claim that he “voted the same way” is incorrect.

A little later in the debate, Joe Biden made this statement:

The middle class under John McCain’s tax proposal, 100 million families, middle class families, households to be precise, they got not a single change, they got not a single break in taxes. No one making less than $250,000 under Barack Obama’s plan will see one single penny of their tax raised whether it’s their capital gains tax, their income tax, investment tax, any tax. And 95 percent of the people in the United States of America making less than $150,000 will get a tax break.

Actually the “100 million” figure is not families. It is not households. It is tax returns. But that’s a somewhat minor issue in the whole scheme of things. The figure is incorrect because Sen. McCain, even relative to a current policy with Alternative Minimum Tax (AMT) patch baseline, does cut corporate income taxes and provides his refundable health care tax credit, which would reduce that “100 million won’t get a tax break” figure. That figure is technically correct if you look only at the individual income tax and ignore Sen. McCain’s health care tax plan, and if you do it relative to a current policy baseline with AMT patch. Furthermore, Sen. Biden makes the same error as Barack Obama in mixing baselines. The “95 percent” figure (when properly used) gives Obama credit for an AMT patch whereas he does not give McCain credit for an AMT patch tax cut when referring to the 100 million figure.

But the “95 percent” figure is just plain wrong as well. According to the Tax Policy Center, no income quintile (including those earning under $150,000) would even see 95 percent of its tax units receiving a tax break under Pres. Obama’s tax plan in 2009. Even in 2012 under Obama’s tax plan relative to current law, an average of the fraction of tax units that receive a tax cut in the bottom four quintiles is less than 90 percent. In other words, Biden’s statement is factually incorrect. The “95 percent” figure is fairly accurate when Obama uses it to talk about the fraction of working families that would receive a tax cut under his plan, but not the entire population nor the entire population earning under $150,000.

Regarding Sen. Biden’s claim that no American making less than $250,000 per year would see a tax hike, that is incorrect too. Some Americans making less than $250,000 would see a tax increase under Pres. Obama. For example, the Tax Policy Center estimates that in 2009, 14.8 percent of tax units earning between $111,645 and $160,972 would actually see a tax increase under Pres. Obama’s proposed tax plan, relative to current law. Now it is true that 83.3 percent of the tax units in that group would see a tax cut, but to say that “no one making less than $250,000 under Barack Obama’s plan will see one single penny of their tax raised” is factually incorrect.

Sticking with the distributional theme, Biden then attacked Sen. McCain’s tax plan, saying:

John wants to add $300 million, billion in new tax cuts per year for corporate America and the very wealthy while giving virtually nothing to the middle class. We have a different value set. The middle class is the economic engine. It’s fair. They deserve the tax breaks, not the super wealthy who are doing pretty well. They don’t need any more tax breaks. And by the way, they’ll pay no more than they did under Ronald Reagan.

Since corporate taxes are ultimately paid by individuals, even the middle class would receive some tax relief under a corporate tax cut. While a corporate tax cut does disproportionately benefit high-income taxpayers (especially under the assumption that it is borne by owners of capital), some in the middle class would still receive a tax cut. It is not “virtually nothing.”

Biden went further on the issue of corporate taxes, pulling out this popular Obama line:

But John McCain will not support a windfall profits tax. They’ve (Exxon Mobil) made $600 billion since 2001, and John McCain wants to give them, all by itself—separate, no additional bill, all by itself—another $4 billion tax cut.

This statement is highly misleading. It is unclear what Sen. Biden even means by “separate, no additional bill, all by itself.” He appears to be implying that Sen. McCain wants an Exxon Mobil Tax Cut bill. But that’s not the whole story. What Sen. McCain is proposing is cutting the federal corporate income tax, which is paid by all profitable corporations. It doesn’t matter whether that corporation is Exxon Mobil or Coca-Cola.

Sen. Biden also talked about small businesses:

…95 percent of the small businesses in America, their owners make less than $250,000 a year. They would not get one single solitary penny increase in taxes, those small businesses.

On the issue of small businesses, the “95 percent” figure is technically true, but those small businesses make up a much smaller fraction of the total small business income in America. It’s not even close to 95 percent. In fact, approximately half of all small business income is earned by those tax returns that would face a tax hike under Sen. Obama’s tax plan. (That doesn’t mean the higher tax is all on small business source income. The Tax Foundation will be publishing more information on this issue next week.)

Finally, as he always does, Sen. Biden also spoke on Sen. McCain’s health care tax plan:

Now, with regard to the—to the health care plan, you know, it’s with one hand you giveth, the other you take it. You know how Barack Obama—excuse me, do you know how John McCain pays for his $5,000 tax credit you’re going to get, a family will get?

He taxes as income every one of you out there, every one of you listening who has a health care plan through your employer. That’s how he raises $3.6 trillion, on your —taxing your health care benefit to give you a $5,000 plan, which his Web site points out will go straight to the insurance company.

And then you’re going to have to replace a $12,000—that’s the average cost of the plan you get through your employer—it costs $12,000. You’re going to have to pay—replace a $12,000 plan, because 20 million of you are going to be dropped. Twenty million of you will be dropped.

So you’re going to have to place—replace a $12,000 plan with a $5,000 check you just give to the insurance company. I call that the “Ultimate Bridge to Nowhere.”

The “$3.6 trillion” figure is incorrect, although that figure had been quoted by the McCain campaign website at one point. In fact, Sen. McCain’s health care tax plan is a $1.3 trillion tax cut. (Gov. Palin doesn’t understand this issue either—see below) Furthermore, Sen. Biden ignores any possible wage response to dropping coverage. He implies that if your coverage is dropped, you are left in a $7,000 hole, but he assumes that your compensation (wages plus health insurance) falls by the full amount of the health insurance program.

Gov. Palin’s Errors

Gov. Palin started off early in the debate trying to label Sens. Obama and Biden as tax hikers. She said:

Now, Barack Obama and Sen. Biden also voted for the largest tax increases in U.S. history. Barack had 94 opportunities to side on the people’s side and reduce taxes and 94 times he voted to increase taxes or not support a tax reduction, 94 times.

This is not true. Even if one considers the expiration of the so-called Bush tax cuts to be a tax increase (it is technically not a tax increase), it would not be the biggest tax increase in history under almost any measure that adjusts for the size of the economy. And Sen. Obama’s presidential tax plan does “raise taxes” relative to a current policy baseline over ten years, but it’s not even close to being the largest tax increase in U.S. history. Relative to a current law baseline, Sen. Obama is actually cutting taxes rather significantly in the aggregate (nearly $3 trillion).

Sticking with the “Obama will raise your taxes” theme, Palin also repeated the “$42,000” line that Sen. McCain has repeated over and over and over:

But we do need tax relief and Barack Obama even supported increasing taxes as late as last year for those families making only $42,000 a year. That’s a lot of middle income average American families to increase taxes on them. I think that is the way to kill jobs and to continue to harm our economy.

As I wrote when Sen. McCain said this in the first debate: 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 tax.

Next, Gov. Palin had this to say about Sen. Obama’s proposed tax hike and how it would impact small business:

But when you talk about Barack’s plan to tax increase affecting only those making $250,000 a year or more, you’re forgetting millions of small businesses that are going to fit into that category. So they’re going to be the ones paying higher taxes thus resulting in fewer jobs being created and less productivity.

The accuracy of her “millions of small businesses” claim depends upon your definition of “small business.” Hers is a rather liberal one, and even under her definition, the true number definitely is not beyond 5 million because there aren’t even 5 million tax returns that make more than $250,000. Again, the Tax Foundation will be releasing information next week on the reality of how small business tax returns would be affected by the two tax plans. The goal is to separate fact from fiction on the issue.

Gov. Palin’s most egregious error of the night was actually repeated twice in 20 seconds. It was on the issue of Sen. McCain’s health care plan, which neither side appears to understand.

I am because he’s got a good health care plan that is detailed. And I want to give you a couple details on that. He’s proposing a $5,000 tax credit for families so that they can get out there and they can purchase their own health care coverage. That’s a smart thing to do. That’s budget neutral. That doesn’t cost the government anything as opposed to Barack Obama’s plan to mandate health care coverage and have universal government run program and unless you’re pleased with the way the federal government has been running anything lately, I don’t think that it’s going to be real pleasing for Americans to consider health care being taken over by the feds. But a $5,000 health care credit through our income tax that’s budget neutral. That’s going to help. And he also wants to erase those artificial lines between states so that through competition, we can cross state lines and if there’s a better plan offered somewhere else, we would be able to purchase that. So affordability and accessibility will be the keys there with that $5,000 tax credit also being offered.

Sen. McCain’s health care tax plan is not budget neutral. It is a $1.3 trillion tax cut over the next ten years, which is therefore the amount that would be added to the national debt under this proposal. It does cost the government something over the next ten years, and it’s almost as expensive as Sen. Obama’s health care tax plan, according to Tax Policy Center preliminary estimates ($1.6 trillion). To be budget neutral, Sen. McCain would essentially have to eliminate the exclusion from payroll taxes for employer-provided health insurance as well as the income tax exclusion. He does not do that. Notice that Gov. Palin, like Sen. McCain did in the first debate, doesn’t give you the whole story on this plan, avoiding the inconvenient fact that he would tax employer-provided health insurance.

Next Debate

The next debate is Tuesday, October 7, and Sens. Obama and McCain will square off once again. We will once again set the record straight regarding the claims made by the candidates on issues of tax policy.


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