DYNAMIC EFFECTS OF PRESIDENTIAL CANDIDATES' TAX PLANS

October 30, 2008

Sens. John McCain and Barack Obama have sharply different visions of how taxes affect economic activity and what modifications to the current system should be made, say economists Stephen J. Entin and Michael Schuyler.

Sen. McCain's tax plan focuses mainly on enhancing economic growth and job creation by reducing marginal tax rates on labor and capital income and by improving economic efficiency.  Sen. Obama's tax plan focuses mainly on income redistribution by raising marginal tax rates.

When fully phased in, and all economic adjustments are made:

  • The McCain tax plan would increase the private sector portion of gross domestic product (GDP) by about 2.7 percent, and the Obama tax plan would reduce it by about 3.5 percent.
  • The difference in private sector capital accumulation would be 15.8 percent or $4.1 trillion in favor of McCain.
  • Hourly wages before-tax would be up 2.2 percent under McCain, down 2.6 percent under Obama.
  • Hours worked would be 0.5 percent higher under McCain, and 1 percent lower under Obama.

The dynamic economic response to the McCain proposals would fully offset the cost of his four major tax elements: the lower corporate and estate tax rates, partial expensing, and the rise in the dependents exemption, for a net revenue gain of about $16 billion.

The dynamic economic response to the Obama plan would be to reduce tax revenues.  However, his business tax increases ("loophole" closings) would result in higher corporate tax revenues, but not as much as a static revenue forecast would indicate. His increases in the two top marginal income tax rates, in the tax rates on capital gains and dividends, and other marginal work disincentives, would depress revenues, resulting in a net revenue loss of about $53 billion a year.

Source:   Stephen J. Entin and Michael Schuyler, "The Candidates' Tax Proposals: Their Impact on Taxpayers and the Economy," Institute For Research on the Economics of Taxation, Policy Bulletin No. 92, October 20, 2008.

For text: 

http://iret.org/pub/BLTN-92.PDF

 

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