Whose Tax Plan Would Do More for the “Middle Class”? Obama’s or McCain’s?

September 20, 2008

An issue that has been debated throughout this campaign is whose tax plan would be better for the "middle class," however you define that. Obama defines "middle class" as anyone making under $250,000. McCain doesn't really define it (remember the $5 million joke?). I don't want to define "middle class" so I'm not really going to answer the title question of this blog post. But I can try to answer whose tax plan would cut taxes for middle-income tax units the most (as defined by the middle 20 percent of all tax units).

Using Tax Policy Center runs, it's clear that if you ignore the health care plans, Obama's tax plan would give a larger tax cut to those in the middle-income groups than McCain's would. Although TPC's runs do not account for any "trickle down" effect to those in the middle-income group, while that effect > 0, it's not likely to make McCain's tax plan more beneficial than Obama's tax plan when ignoring the health care plans. But those who have followed the issue of taxes in this campaign understand this. One of Obama's tax planks is to essentially redistribute via the tax code, whether you agree or disagree with that.

Now intelligent people will understand this issue in the context of the myriad problems associated with distributional analysis, most notably the fact that we aren't doing a lifetime analysis and that we are mixing different types of tax unit arrangements such as singles and married couples. These are merely snapshots. So somebody who is middle-income today (say a single tax filer who is 25) could be high-income in five years (married at age 30).

But putting this issue of lifetime incidence aside and focusing on the mere snapshot for 2009, while Obama's tax plan would cut taxes for more middle-income tax units than McCain's when ignoring the health care plans, when one adds in the health care plans of the two campaigns, it becomes less clear. Obama's health care plan is largely administered on the spending side whereas McCain's is done through the tax side. And McCain's health care tax cut (it is a tax cut for most in 2009) would outweigh in the aggregate for the middle-income tax units the difference in tax cuts between Obama and McCain when we ignored the health care plans. McCain's health care tax plan is actually the most progressive part of his tax policies. It's an additional tax cut that would cost $1.3 trillion.

So if you look at the middle-income tax units, as measured by TPC preliminary estimates, and if you count the health care plans of both candidates (counting Obama's direct subsidies as equivalent to tax cuts), the middle-income tax units would actually receive a greater post-fisc income increase in the aggregate under McCain than under Obama.

The problem with this analysis is that McCain grows the national debt by a lot more than Obama. So if you equalized Obama and McCain's total fiscal impact, Obama would give more relief to the middle-income tax units as a whole. (In other words, a larger share of Obama's fiscal plan goes to the middle-income tax units than McCain's; or for every $1 of fiscal spending or tax cuts, Obama's is more likely to go to the middle-income units than McCain's.) The true fiscal impact therefore depends upon your assumption of the incidence of the national debt…and we'll leave that for another day.


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