IRET Study Compares the McCain and Obama Tax Plans

IRET has issued a study examining the tax changes proposed by Presidential candidates John McCain and Barack Obama. The study finds that most of Senator McCain's recommendations, such as a lower corporate income tax rate and estate tax relief, would reduce tax biases against investment and work effort. Most of Senator Obama's proposals, such as higher rates in the top two income tax brackets and an expansion of refundable tax credits (i.e., checks from the U.S. Treasury to those who do not pay taxes), are aimed at using the tax system to redistribute income. They would worsen tax biases against production.

The tax plans would effect economic activity as people responded to the altered work and saving incentives. The IRET study estimates that the McCain tax plan would increase the private sector portion of gross domestic product (GDP) relative to the baseline by about 2.7 percent, while the Obama tax plan would reduce private sector GDP by about 3.5 percent, a significant 6.2 percent difference in output and income between the two plans. (See Chart 1.) 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, a 4.8 percent difference. Hours worked would be 0.5 percent higher under McCain, and 1 percent lower under Obama.

If one naively assumed that taxes do not influence the overall economy (static analysis), Senator McCain's taxpayer relief would appear to cost the government money. However, the IRET study considers economic feedbacks and estimates that the added growth from the McCain plan would prevent tax collections from falling. Meanwhile, because of negative economic feedbacks, Senator Obama's tax proposals would be more expensive than advertised.

Economic feedbacks are also important when considering how the two plans would affect people at different income levels. The study estimates that Senator McCain's tax proposals would help people at all income levels by enlarging the economic pie. Excluding its refundable credits, the study estimates that Senator Obama's tax proposals would reduce after-tax incomes at all income levels because it would shrink the economic pie.

The IRET study is "The Candidates' Tax Proposals: Their Impact On Taxpayers And The Economy," IRET Policy Bulletin 92, October 20, 2008. It's authors are Stephen J. Entin, IRET President & Executive Director; and Michael Schuyler, Senior Economist.

IRET Study and CFP Video Criticize Energy Bill

We recommend a new video sponsored by the Center for Freedom and Prosperity that uses humor to examine the undesirable, unintended, but inevitable environmental consequences of an increased ethanol mandate. The video beautifully illustrates some of the points made in early December in an IRET Congressional Advisory.

The IRET Advisory warned about some of the economically undesirable features in the House and Senate versions of proposed energy legislation. According to the study's author, IRET President Stephen Entin, the government should "focus on removing government tax and regulatory obstacles to efficient energy exploration and production." Instead, the proposed legislation would emphasize government micromanagement that includes intrusive mandates, punitive taxes on established energy sources, and subsidies for expensive alternative energy sources.

For example, both the House and Senate proposals would greatly expand mandates for the use of government-subsidized ethanol, which would further raise food prices and require the cultivation of more land. Entin points to a better option, "It is very easy and cheap to obtain energy by growing corn: just trade the corn for foreign oil."

The IRET study is IRET Congressional Advisory, No. 232: "Energy Bill Compromise: Two Wrongs Make A Mess". The CFP video is available here.

Wall Street Journal Publishes IRET Commentary

In an article appearing in the Wall Street Journal on the October 19, 2007, Stephen J. Entin, IRET's President and Executive Director, explained why the Bush tax program, especially the 2003 Tax Act, should be retained. The 2003 Tax Act substantially lowered marginal tax rates, and reduced the double taxation of corporate income at the shareholder level, which "boosted productivity by encouraging the investment to make a larger capital stock possible. That investment is what finally kicked the recovery into a higher gear."

The article provides quantitative estimates of what will happen to the economy if the tax cuts expire. "The stock of business plant, equipment, and inventories would ultimately be about 16% less compared to what it would be under current tax rates. Hours worked would fall 2%. Private-sector output and wage and capital income would drop 7%. That would mean an eventual 5%-6% reduction in GDP." Further, the government's revenue take, which is the reason often given for reverting to higher taxes, would be much less than those in government predict.

The full article is available here: Save the Bush Tax Cuts

SCHIP Passes Congress, Faces Veto

Congress has passed a big expansion of SCHIP (State Children's Health Insurance Program). The bill would more than double the size of the program, originally focused on poor families, to cover children in millions of middle income families who already have private insurance.

President Bush is expected to veto the bill. He had proposed a 20% increase in SCHIP, enough to fully fund a renewal that would cover health cost inflation and the rising number of children in the originally qualifying income categories (families with income up to 200% of poverty).

The main funding mechanism in the final bill is a nasty, regressive tobacco tax hike. Low income families already covered by SCHIP could lose big. They would have the same real health benefits as now, but would face a stiff tax hike (if the parents smoke) to pay for higher income enrollees.

The bill deserves a veto. For more discussion of the final and original bills, see IRET Congressional Advisories 221, 226, 228.

Stephen J. Entin,
IRET President and Executive Director

May 11
 

IRET Leaders Receive Award of Merit from Yorktown University
Stephen Entin Will Address Supply Side Economics Conference

IRET's President, Stephen Entin, and IRET's founder, the late Dr. Norman B.Ture, are to be honored with Yorktown University's Award of Merit this Thursday, May 13, at a program devoted to supply side economics to beheld in Las Vegas, NV. Other recipients include Nobel Laureate Professor Robert Mundell, Professor Arthur Laffer, economist and columnist Dr. Paul Craig Roberts, Jude Wanniski of Polyconomics, Alan Reynolds and Steve Moore of the CATO Institute, Lawrence Kudlow economics writer and television personality, and the late Robert Bartley, editor of the Wall Street Journal. All participated in the theoretical development and publicizing of supply side economics and its implementation in the policies of the Reagan Administration, or in more recent efforts to promote economic growth through improved tax policy.

The awards are given "For their contribution to the neo-classical revolution in modern economic thought known as supply-side economics. Their efforts have led to a clearer understanding of the workings of the American economy and how public policy affects economic performance. This revolution in thinking has been critical to the development of sound tax, spending, and monetary policies conducive to economic efficiency and growth and to the maximization of individual freedom, opportunity, and prosperity."

Mr.Entin will be one of the featured speakers at the conference, describing the founding and fundamentals of supply side theory and recounting the early struggles by people inside and outside of government to bring these new ideas to the attention of the public, the press, and the Congress. Mr. Entin's talk will begin at 3:50 p.m. EDT (12:50 p.m. PDT). The full program will be webcast at www.yorktownuniversity.com from 3 p.m. to 8:15 p.m. EDT (or 12 noon to 5:15 p.m. PDT).

Supply Side Economics Articles

IRET's president, Stephen Entin, will lecture at the Yorktown University conference on the development of supply-side economic theories and their impact on public policy leading up to the 1981 Reagan tax cut.

Yorktown University is presenting Mr. Entin with a public policy award for his work on these new theories and policies while working at the Congressional Joint Economic Committee and the Treasury Department from 1975 to 1988.