A Perspective on Senator Obama and McCain’s Economic Policy Proposals

This will be remembered as a historic U.S. election when the U.S. and global economy are in the midst of the worst financial crisis and recession in decades. Millions of households on the verge on losing their homes or jobs look out for a President who can address their present woes like falling home values, rising mortgage and other debt, risk of foreclosure, declining returns from stock market, erosion of retirement savings and the risk of being laid-off. But Americans are also looking for a President who can deal with the challenges brought forward by this crisis such as improving regulation, oversight, dealing with mortgage debt. Moreover, long-term policy issues will need to be addressed like access to quality health care and its rising cost, trade and off-shoring related job losses and competition with global labor force, high gas prices and the country’s energy policy, ballooning defense spending and foreign policy stance, growing inequality and middle-class wage stagnation.

Depending on which party comes into power in the White House and in Congress, there will be important implication on financial sector regulation, energy policy (at global level) and oil sector, health insurance and pharma companies, tax incidence on high income-groups and corporate sector, global trade talks and pre-conditions under trade agreements, immigration and globalization in general. Below is a summary of the policies proposed by the two Presidential candidates:

 

Policies to Deal with the Current Economic Crisis

Sen. Obama

·         Supported the $700 bn TARP program and the policy to increase deposit insurance from $100,000 to $250,000

·         Has been a critique of severance packages of exiting CEOs at troubles institutions like Fannie & Freddie

·         Greater financial sector oversight via creation of a financial market oversight commission) to oversee liquidity, capital and disclosure requirements. Streamlining regulatory agencies to prevent overlap. Greater role of SEC in preventing market manipulation

·         A ninety-day moratorium on home foreclosures and modification of bankruptcy laws; $10 bn in foreclosure-prevention fund, 10% mortgage tax credit for middle-class

·         Allow families to withdraw up to $10,000 from retirement funds in 2008-09 without tax penalty; temporarily scrap tax on unemployment benefits

·         A $1000 energy tax rebate in Fall 2008 financed by taxing windfall profit of oil companies

·         Fiscal stimulus for the economy including: $25 bn grants for state and local governments  (to prevent cuts in health, education and for housing assistance); $25 bn for infrastructure jobs, unemployment insurance, rebate cheques; aid for auto industry; tax credits for firms that create jobs in next 2 years

 

Sen. McCain:

·         Supported the $700 bn TARP program

·         Increase financial sector oversight

·         A $300 bn program to buy 10 mn mortgages with negative home equity and refinance them with govt. funds

·         Around $52.8 bn to reduce tax rate on capital gains and unemployment benefits; allow households to withdraw from retirement account during 2009-10

Individual Income Tax

Sen. Obama:

·         Extend 2001 tax cuts in 2011 for the 10%, 15%, 25% and 28% tax bracket income-groups but raise it to 36% and 39.6% from the current 33% and 35% for the over $200,000 and $250,000 income-groups respectively (When this is added with the state income tax, Medicare tax along with the proposed tax on Social Security and removal of several exemptions and deductions for this income group, the total marginal tax rate might be much higher)

·         Withdraw exemptions and cap itemized deductions for high-income groups

·         Expand the Earned Income Tax Credit (which would benefit low and middle-income groups)

·         Extend AMT patch implemented in 2007 and index it to inflation

·         Tax breaks for retirees, homeowners, students, R&D

Sen. McCain:

·         Extend the 2001 and 2003 tax cuts for all income groups to maintain the current tax rates;

·         Double the size of the tax exemption for dependents ·         Extend AMT patch implemented in 2007 and index it to inflation

Capital gains and Dividend Taxes

Sen. Obama: When Bush’s 2001 and 2003 tax cuts expire in 2011, the capital gains tax rate would remain unchanged for 98% of the population at 0% (for the 10% and 15% income-tax bracket) and at 15% (for the rest of the income-groups below $250,000 income). But capital gains and dividend tax rates will be raised to a maximum of 20% for the above $250,000 income group. Carried interest of private equity and hedge-funds will be taxed as ordinary income (at a higher rate) rather than as capital gains

Sen. McCain: Extend the 2001 and 2003 tax cuts to keep capital gains and dividend tax rates unchanged at 0% (for the 10% and 15% income-tax bracket) and at 15% (for the rest of the income-groups below $250,000 income).

Estate Tax

Sen. Obama: Make estate tax permanent at the 45% tax rate with an exemption limit of $3.5 mn

Sen. McCain: Make estate tax permanent at a lower tax rate of 15% with a higher exemption of $5 mn

Corporate Sector

Sen. Obama: Cut corporate tax to below 35%. Broaden corporate tax base and reduce loopholes, close international tax havens. Give tax breaks to firms that keep headquarters in the U.S. Support legislation for having a shareholder vote on CEO pay

Sen. McCain: Cut corporate tax rate from 35% to 25%. Allow firms to deduct the cost of all spending on long-term equipment rather than depreciate it over time. Support legislation for having a shareholder vote on CEO pay

Social Security Reform

Sen. Obama: Remove the earnings cap on payroll taxes and raise the payroll tax on over $250,000 income-group (from the current cap on the tax at $102,000 income). A job-portable, tax-deferred Retirement Fund.

Sen. McCain: Finance Social Security by cutting benefits and placing part of the payroll tax into an individual private investment retirement account

Spending and Fiscal Deficit

Sen. Obama: Increase public investment especially in infrastructure, research, technology; affordable university tuition. Close tax loopholes (esp. corporate taxes) to fill in revenue gap. Balance the budget by using pay-go rule

Sen. McCain: Review spending, cut discretionary spending, earmarks and Medicare spending. Increase expenditure on defense spending, Iraq and veterans health care. Balance budget by 2013.

McCain tax policy focuses on supply-side economics to incentivize investment, improve country’s tax competitiveness, attract large global companies, help small businesses grow and raising productivity. On the other hand, Obama’s policies concentrate on redistribution policies (many economists indicate tax policy in recent years as one of causes on rising income inequality) and incentives for low and middle-income labor.

According to some studies, the tax reduction (and loss of tax revenues) under Obama will be much smaller than under McCain. Obama’s tax plan offers larger tax cuts and increase in after-tax income for a larger no. of low and middle income households while the after-tax income for top 1% income group would fall. On the other hand, McCain’s tax plan would raise the after-tax income for a larger no. of high-income groups.

Also, reducing earmark spending (which account for less than $20 bn) may not be enough to finance tax cuts under McCain’s plan. Obama’s health plan might also increase the deficit over the next ten years, especially when compared to McCain’s health plan. Moreover, without substantial cuts in government spending, both plans would sharply increase the national debt (though by much larger under McCain).

A Democratic Congress might strengthen Obama’s stance to raise taxes especially amid criticism that recent tax cuts dented the fiscal deficit, created investment distortions, and income and wealth inequality. But the economic slowdown might limit or delay the President’s ability to raise taxes (as proposed by Obama) or cut spending (as proposed by McCain) in the near-term. Another challenge for the incoming President will be to cope with the fiscal costs of the housing and financial sector bailout and fiscal stimulus bill even as economic slowdown impacts the recent boom in tax revenues from corporate, capital gains, dividend and property taxes. But more importantly, the President will have to find new revenue sources and solutions to the structural fiscal deficit amid rising Medicare and Social Security bill in the next few years.

Health Care Reform

Sen. Obama:

·         Universal health insurance coverage with mandates only for children

·         Subsidized premium for low and middle-income households. Health care for fuel-efficient automakers

·         Create a regulated National Health Insurance Exchange to purchase individual insurance and extend Federal Employee Health Benefit Program for all

·         Tax firms that don’t offer insurance to their employees

·         While a higher no. of people will be insured under his plan over the next ten years than under McCain’s health plan, the health care spending might rise

Sen. McCain:

·         Job-portable non-mandatory insurance system with federal aid for people denied coverage and option to purchase insurance across states

·         Replace the current tax exclusion for employer-paid insurance with a refundable income tax credit of up to $5000 for households and $2500 for individual coverage for purchasing insurance (financed by taxing employer-based insurance)

·         Cut costs by increasing competition among insurance providers and drug companies, investing in preventive health care, purchasing low-cost/generic drugs from Canada and pre-setting treatment costs

·         Though the proposed tax credits will be larger than the tax breaks under the employer-provided insurance, these credits would push households into higher tax bracket but may fail to keep pace with rising insurance premiums. Tax on firms might also be a disincentive for employer-based insurance

Trade Policy

Sen. Obama:Include environmental and labor standards in trade agreements. Raise duties on Chinese imports to compensate for undervalued Yuan, dumping of goods and violation of intellectual property rights. Scrutinize investments by Sovereign Wealth Funds. Provide farm subsidies only for poor farmers not big farms. Provide amnesty for immigrants

Sen. McCain: Ensure safety of Chinese imports. Eliminate farm subsidies. Support bilateral trade agreements and multilateral trade talks.

A Democratic President and Congress may put emphasis on pre-conditions on trade agreements and global trade talks especially as global slowdown poses risk of slowing trade and any possible rise in protectionism. But aversion to trade might be overrated as they realize the risk of unilaterally withdrawing from global trade

Incentives for Labor

Sen. Obama: Raise minimum wage adjusted for inflation. Introduce laws to make union organizing easier. Reform the Trade Adjustment Assistance, wage insurance and worker retraining programs to help workers compete with global workers

Sen. McCain: Streamline retraining programs and provide social safety net to workers affected by global competition, technological change led job displacement. Revamp unemployment insurance. Raise wage insurance for older workers

 

Energy Policy and Climate Change

Sen. Obama:

·         Increase public investment in energy technology and renewable energy with tax credits

·         Tax windfall profit of oil companies.

·         Mandatory targets for emission cuts with cap-trade and coal-to-liquid fuel program

·         Greater U.S. role in a global climate change pact to replace the Kyoto Protocol

 

Sen. McCain:

·         Legislation for carbon emission cuts with incentives for private investment for nuclear power, clean and alternate energy

·         Use free market and innovation to reduce greenhouse emission; Tax credits for buyers of zero emission cars ·         Legislation for offshore drilling

7 Responses to "A Perspective on Senator Obama and McCain’s Economic Policy Proposals"

  1. Anonymous   November 3, 2008 at 6:44 pm

    Obama!!!!!!!!!!!!!!1

  2. Bob Woodward   November 3, 2008 at 7:53 pm

    Thanks for this seemingly balanced summary.

  3. Guest   November 4, 2008 at 5:42 am

    I think it is perfectly obvious Obama has the best policies.. and is more likely to carry them out

  4. Guest   November 4, 2008 at 12:21 pm

    i hope Obama wins! because at my school, there are kids who think Mccain will help the economy..

  5. Anonymous   November 4, 2008 at 5:01 pm

    GO MCCAIN!!!

  6. Anonymous   November 5, 2008 at 11:54 am

    OBAMA!!!!!

  7. Anonymous   November 17, 2008 at 8:26 pm

    kaka