McCain's muddled tax message

[Guest Aloysius]

A very interesting Clive Crook column:

McCain is no salesman on tax proposals

 

By Clive Crook

 

So much has gone wrong for John McCain that it is surprising he is not further behind in the polls. He has been a victim of circumstances and his own bad judgment. Some of his errors, however, are more perplexing than others. How is it, for example, that Mr McCain has been so thoroughly outmanoeuvred on tax policy?

 

Both candidates have offered complex tax proposals. Proliferating alternative baselines (with or without the extension of the Bush tax cuts, with or without a “patch” for the alternative minimum tax, and so forth) deepen the confusion. Unable to fathom the details, voters are left to weigh the competing slogans. Mr Obama promises to cut taxes for 95 per cent of working families. Mr McCain says the rich need a tax cut, too. Guess who wins that argument.

 

Here is a fact you might not have noticed. It certainly seems to have slipped by most Americans. The typical US household would get a bigger tax cut under Mr McCain’s proposals than under Mr Obama’s. I know a few politicians who could do something with that.

 

Broadly speaking, Mr McCain proposes to leave the Bush tax cuts in place. Mr Obama proposes a big increase in taxes on people earning more than $250,000 (€187,000, £145,000) a year, in order to cut taxes and increase subsidies at the bottom; for the middle, he too would mostly keep the Bush tax code. Middle-income households do come out slightly ahead under the Obama plan – but only if you leave out the effect of Mr McCain’s healthcare proposal. The question is, why would you do that?

 

Mr McCain wants to abolish the tax-break for employer-provided healthcare and replace it with a refundable $5,000 credit. Mr Obama says that a family health plan might cost $12,000 a year – leaving families who buy their own policy $7,000 worse off. This is incorrect. So far as I know, Mr McCain has never taken the trouble to explain why.

 

Suppose a family currently has a $12,000 policy provided by an employer. Under the McCain proposal, instead of attracting relief as at present, this benefit would be taxed as ordinary employment income – but the extra tax paid would be more than offset by the new $5,000 credit. In the first analysis, nothing changes so far as employers are concerned: all the action is on the employee’s pay cheque. The policy delivers a net tax cut to middle-income households and is enough to make the McCain tax plan on average a better overall deal for them than the Obama plan.

 

Odd, don’t you think, that the McCain campaign should think this unworthy of emphasis?

 

It is true that the healthcare credit would have additional longer-term consequences – some desirable, some not. Since the credit is fixed in value, taxpayers would have an incentive to choose cheaper plans (with bigger deductibles and co-payments). That is a good consequence: it would exert some downward pressure on healthcare inflation. Less desirable is that healthy young workers might prefer to opt out of employer-provided plans in return for more pay, because they could find cheaper cover for themselves elsewhere. This would make the employer’s pool of employees riskier, and drive up premiums. It might encourage some employers to stop providing cover altogether and that would leave riskier workers at a disadvantage.

 

A defect of the McCain plan is that it fails to combine the tax incentive to economise with adequate measures to assure coverage. Its direct effect on middle-income households, though, is still to cut taxes by more than Mr Obama’s plan.

 

As well as failing to drive this home, Mr McCain has only weakly resisted his opponent’s notion that “wealthy companies” can afford to pay more. Business taxes, in the end, are paid by people – in lower wages, higher prices and lower dividends in their 401k plans. The point is not just that US corporate taxes are high by international standards and that this discourages investment and employment but that the burden eventually falls on ordinary Americans. Perhaps Mr McCain’s recent emphasis on corporate greed makes it difficult for him to point this out.

 

When Mr McCain misrepresents Mr Obama, he cannot even do it plausibly. Mr Obama is indeed planning to cut taxes for 95 per cent of working families. Rather than saying, “No he isn’t”, Mr McCain could have said: “Look at what his changes do to marginal tax rates, at the bottom of the income scale (as benefits are phased out), as well as at the top.” Rather than saying, “He wants to raise your taxes,” he could have said, “His spending plans will force him to raise your taxes.”