Would Obama Tax Your Life Savings?

October 27, 2008

A new John McCain ad out makes this claim:

I know your life savings have been hit hard, but we'll rebuild them.

Barack Obama wants to increase taxes on your savings.

You can't afford that.

He's quite a talker.

But that's just bad judgment.

So would Obama increase taxes on your savings? Maybe. In terms of direct tax increases on your savings, Obama's tax plan (as stated now) would likely not increase your taxes on savings if you make less than $250,000. That's because he favors keeping the lower income tax rates on both ordinary income (interest) and dividends and capital gains for those in the bottom four income brackets. Now it is true that a disproportionate amount of income derived from savings would be taxed given that Obama seeks to raise the rates on those who earn a disproportionate amount of the income from savings.

But there are the indirect effects on your savings as well from other tax changes that Sen. Obama is proposing. Raising taxes on capital gains or dividends on upper-income individuals could have an adverse effect on those who hold savings yet don't directly face the higher rates. Maybe the fact that he raises taxes on a large fraction of business income taxed in the individual code could adversely affect the savings of those not in the top two rates. However, by this argument of economic incidence in a general equilibrium setting, the McCain campaign is inconsistent because it keeps pointing out when attacking Obama's plan that many of those in the bottom don't pay any income taxes. If these lower-and-middle income people would bear any burden from higher taxes on businesses and higher taxes on those at the top, then they are actually paying some of the individual income tax, albeit indirectly through lower wages and lower returns to savings.

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