The Election Choice: Taxes

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The Election Choice: Taxes
By Brian Carney
Op-Ed
The Wall Street Journal
October 25, 2008

When it comes to taxes, the difference between Barack Obama and John McCain is arguably as wide as it's been in a presidential race since Ronald Reagan and Walter Mondale battled in 1984. Sen. Obama is proposing to raise taxes more than any recent candidate, while Sen. McCain wants to cut them substantially. ...

Mr. Obama would roll back the 2001 and 2003 tax cuts for taxpayers in the top two brackets, raising the top two marginal rates of income tax to 36% and 39.6% from 33% and 35%. The 33% rate begins to hit this year at incomes of $164,550 for an individual and $200,300 for joint filers. Mr. Obama claims no "working families" earning less than $250,000 would pay more in taxes, but that's because he defines income more broadly than the taxable income line on the IRS form. If you're an individual with taxable income of $164,550, you will pay more taxes.

The Democrat would also reinstate the phaseout of the personal exemptions and itemized deductions for married couples making more than $250,000 a year. Those phaseouts would raise the top marginal tax rate for millions of taxpayers by another 1.5 percentage points.

Capital gains and dividend taxes would increase to 20% from 15% for those making more than $250,000...

Mr. Obama's most dramatic departure from current tax policy is his promise to lift the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $102,000, a level that is raised for inflation each year. The Obama campaign says he'd raise the payroll tax rate on incomes above $250,000 by as much as two to four percentage points -- though it's unclear if that higher rate would apply to the employee, the employer, or both.

In any case, lifting the cap would change the nature of Social Security from an insurance program -- which pays out based on how much you paid in -- into a wealth-transfer program that is far more progressive.

Taken together, these add up to about a 10-percentage-point hike in marginal tax rates for those making more than $250,000 a year, including millions of small businesses that pay taxes at individual rates. The "marginal" rate refers to the rate paid on the next dollar of income, and it has an especially strong influence on decisions to work and invest.

Meanwhile, House Ways and Means Chairman Charlie Rangel has proposed an additional 4% "surtax" on incomes above $200,000. This would further increase the top marginal federal income tax rate to close to 50% -- or slightly above that, depending on the rate of the new Social Security tax -- when combined with Mr. Obama's hikes. ...

In sum, Mr. Obama is proposing to use the tax code to substantially redistribute income -- raising tax rates on a minority of taxpayers to finance tax credits and direct income supplements to millions of others. How much revenue his higher rates would raise depends on how much less those high-earners would work, or how much they would change their practices to shelter their income from those higher rates. ....