Fact Checking Tax Policy Discussion in the Final Presidential Debate

Fact Checking Tax Policy Discussion in the Final Presidential Debate


October 15, 2008
By Gerald Prante


On the issue of whose tax plan would provide more relief to middle-income taxpayers, Barack Obama once again brought out this line:

“And 95 percent of working families, 95 percent of you out there, will get a tax cut. In fact, independent studies have looked at our respective plans and have concluded that I provide three times the amount of tax relief to middle-class families than Sen. McCain does.”

The "95 percent" figure is correct. Even though many conservatives have argued that you can't cut taxes for people who pay no income taxes, most of those who are receiving refundable tax credits on the income tax side are still net taxpayers given that they do pay payroll taxes, corporate income tax, excise taxes, etc. (And even that assumes the fact that a person is a net taxpayer even matters, versus the net fiscal incidence of the person, and once we go down that road, at least we are actually getting somewhere on the core questions of public finance and the role of government in distributional outcomes.)

The independent study that Sen. Obama is referring to comes from the Tax Policy Center, which does indeed verify this fact for middle-income tax units when you exclude the effects of the two candidates' health care plans. What Sen. Obama doesn't tell us is that Sen. McCain's health care tax plan (which he criticizes on many occasions, and in his ubiquitous TV ads) would actually provide more savings to middle-income tax units (as a group) than Sen. Obama's health care plan. And when you include the effects of these health care plans, the "three-times as much tax relief" claim no longer holds. When TPC ran the tax plans, they analyzed the health care plans separately from the other parts of the candidates' tax plans.

Speaking of Sen. McCain's health care plan, Sen. Obama once again made this invalid comparison:

“By the way, the average policy costs about $12,000. So if you've got $5,000 and it's going to cost you $12,000, that's a loss for you.”

Sen. Obama's saying outright that Sen. McCain's plan is a loss for you is nonsense.

The $12,000 cost and $5,000 credit are not comparable unless one assumes two facts for McCain's health care tax plan: (1) the worker will be dropped by his employer, and (2) the worker's wages will not increase to offset the lost health care. For most workers, this isn't going to happen. If somebody is receiving $12,000 in health insurance that is now taxed as ordinary income (and there is no dropping of coverage), a $5,000 credit is going to more than offset the additional tax a person must pay on his/her employer-provided health insurance. Eventually, since the credit is indexed for inflation and not health-care costs, the credit's value would diminish. But over the next ten years, the Tax Policy Center has estimated that McCain's health care tax plan is a $1.3 trillion tax cut for American taxpayers, and they have shown that the average middle-income tax unit would be better off under McCain's health care tax plan than Obama's in that time period. Now it is true that the average doesn't hold for everyone in the middle, and some will gain a lot in the middle and some could lose a lot in the middle (such as those whose coverage is dropped), but the reality is that the health care tax plan is the most progressive part of Sen. McCain's plan. It would make the federal income tax more progressive.

Finally, on the issue of small businesses, Sen. Obama said this in defense of his tax plan's impact on small businesses:
“The last point I'll make about small businesses. Not only do 98 percent of small businesses make less than $250,000, but I also want to give them additional tax breaks, because they are the drivers of the economy. They produce the most jobs.”

That "98 percent" figure is technically correct under certain assumptions, but it's basically irrelevant given the latter point he wanted to make. Under Sen. Obama's metric where the mere number of tax returns affected by his tax plan is what matters (2 percent), a small business that earned $100 in business income and had only one employee would have the same "drive" of the economy as a small business that earned $500,000 in net income and had 50 employees. Obviously, that's ridiculous, but it fits with the theme of this campaign: if it sounds good, say it, even if it's misleading (or not true).

Summary

Is it November 5th yet?