Wednesday, May 14, 2008

Sen. John McCain: a Deeper Look at his Tax Views

As the fight for the Democratic nomination continues, the voters decided that Senator John McCain would get the Republican nomination months ago. Although there were a few other conservative candidates, they all dropped out early on in the election cycle. However, other Republicans frequently criticize McCain for being too liberal and not representing the whole party. Who can forget when attention-starved, political author Anne Coulter announced she would vote for Hilary Clinton over John McCain?

This is the third and final entry in my deeper look at the presidential candidate’s tax views. Unlike Clinton and Obama, McCain’s economic views represent the views of conservatives with tax cuts for higher income individuals and no tax increases.

Make Tax Increases More Difficult
One of the most radical tax views of McCain is his desire to make additional tax increases more difficult. He hopes to follow California Republicans in requiring a 3/5 super majority for any tax increases. This will, in effect, give the minority in congress more power and leverage to negotiate trades for important votes. However, in given the current economic uncertainty, such a barrier could have devastating effects. This is especially the case under McCain’s plan to increase our military presence around the world. It will cost the government billions of dollars. But without proper funding, a war cannot continue. Yet, with McCain’s plan it would be difficult to pass tax increases to cover these military expenses.

Alternative Flat Tax System
Although McCain does not support an outright switch to a flat tax, he is making strides towards one. Like any Republican, McCain is not a big fan of our current progressive tax system. His plan is to expand the 15% tax bracket to lower taxes on millions of middle income Americans. Under his plan, the ceiling for the 15% bracket would increase from $43,050 to $70,000 for married couples filing jointly, and from $25,750 to $35,000 for single taxpayers.

The more revolutionary aspect of his plan is the offering of an optional flat tax system. This system would be held out as an alternative to the current progressive system and the myriad of credits, exemptions, deductions, carryover rules, and different tax rates for different forms of income. McCain’s plan would be to tax all taxpayers on all income sources at one single rate. The flat rate would be set at 19% for first two years, 17% thereafter.

McCain’s tax cut plan is estimated to cost the federal government about $240 billion in the next five years, and over $500 in 10 years. However, these are early estimates and with current inflation levels, his plan could cost even more.

When speaking about his plan to fix the tax code, McCain claimed that, "the tax code now requires $140 billion of American families' income to prepare their tax returns." Unfortunately, he greatly overestimated this number. The exact cost attributed to individual taxpayers was only $65 billion, and some estimate the total at a much lower $20 billion. Although McCain's camp said he was drawing his figures from a 2005 report by the President's Advisory Panel on Federal Tax Reform, the study was not just on families, it included both individual and business taxes

Gas Tax Holiday
The Gas Tax Holiday is one of the few tax proposals that are supported by both McCain and Clinton. As I have mentioned before, this plan is to stop the collection of federal taxes on gasoline and diesel from Memorial Day to Labor Day. Currently the federal government collects an excise tax in the amount of 18.4 cents for gasoline and a 24.4 cents for diesel. Some estimates have cited average savings of $70 per person, but the exact numbers are widely disputed.

Although the phrase “gas tax holiday” sounds good, this holiday is getting a lot of criticism for being nothing more then a campaign gimmick. Within a few days of the announcement 200 of the top economists came forward saying the plan was worthless. Many claim that lower prices would lead to more demand, and only the big oil companies would get anything out of the holiday.

Repeal Alternative Minimum Tax
In addition to lowering taxes on middle income families, McCain also wants to repeal the Alternative Minimum Tax (AMT), which would basically be a tax cut for the upper middle income taxpayers.

“I believe that we've got to simplify the tax code,” claims McCain. “But one of the first areas we've got to go after is the alternate minimum tax, which is going to eat in to 20 million American families if we don't eliminate it, and very quickly.”

Although the AMT is very unpopular it generates billions of dollars in federal revenue. In addition, remember that the president does not have the power to just remove a tax – only congress does. If McCain wants this tax fully repealed, then he is going to have to strike a deal with congress, and it seems highly unlikely that he would get enough support to make this drastic change.

Extend President Bush Tax Cuts
Although McCain had originally voted against the Bush tax cuts, he now claims to support an extension of the plan. “I voted to extend them because it would have the effect of having a tax increase,” claimed McCain when asked about his flip-flop. “The tax cuts have increased revenues enormously. They've been very beneficial. The problem is that spending has lurched completely out of control. My proposal was to restrain spending. I do not support tax increases. And the effect of not making them permanent would have the effect of a tax increase.”

Unfortunately, changing your view on important issues is suicide for a presidential hopeful. Think back to the 2004 election, and how strongly the Bush campaign pushed the flip-flop label on John Kerry. Voters do not tend to vote for someone they feel will flip on an issue, yet if McCain wants to win the election he is going to need to.

Cut Corporate Tax Rates
Another tax cut McCain supports is cutting the corporate tax rate from 35% to 25%. The United States has one of the highest corporate tax rates in the developed world. If we want businesses to stay in this country then we need to keep our tax rates competitive. McCain’s plan does just that.

Revisions to Charitable Contributions
Another controversial component of McCain’s tax plan is his hope to revise the current laws on charitable contributions. Under his plan, taxpayers that give charitable contributions in the form of stock, real estate, bonds, or artwork would not be able to take a tax deduction for the current, inflated value of the gift. Instead, they would only be allowed to take a deduction for the original cost of the asset.

McCain claims this would only affect the richest Americans who take advantage of this loophole to reduce their tax liabilities. However, the plan has been met with loud criticism. The current administration has publicly stated “anything that would take money away from a charity is a step in the wrong direction.”

“Wealthy Americans shouldn’t get a tax write-off for contributing a fancy painting or an overvalued stock,” responded a spokesperson for McCain. “Bush is protecting his wealthy donor base at the expense of the middle class.”

Health Insurance Tax Credit
When it comes to health care, McCain wants to give more responsibility and control to individual patients. His plan would remove current tax breaks given to employers to provide health insurance, and replace it with a $5,000 credit to families who purchase their own health care. He suggests that it would encourage choice and competition in the market, thus lowering current prices. “I’ll work tirelessly to address the problem,” Mr. McCain claimed in a speech at the University of South Florida. “But I won’t create another entitlement program that Washington will let get out of control. I won’t do it. Nor will I saddle states with another unfunded mandate.”

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