Barack Obama says he supports a tax cut for 95 percent of all Americans. He is referring here to his proposal for a $500 refundable income tax credit for all workers, except those in the top 5 percent of income earners. These folks, for some reason, are to be singled out for "special treatment" -- i.e., tax increases -- unless, as he told ABC anchor George Stephanopoulos last week, "the economy remains weak." So apparently even Obama recognizes that his tax increases would be economically harmful.
Because Obama's tax credit does not reduce marginal tax rates, it will not benefit the economy. It provides no added incentives for work, savings, investment or business expansion. Because it's refundable (meaning workers get it even if they have little or no income tax liability), for many it will involve just another check from the government, rather than a reduction in tax liability. In those cases, it would not be a tax cut at all, but a transfer payment and a direct drain on tax revenues.
McCain proposes to double the personal exemption for each dependent from $3,500 to $7,000, for all families regardless of income. For middle-class workers in the 25 percent tax bracket, this $3,500 increase would reduce their tax liability by $875 for each child. While this tax cut also does not involve a reduction in marginal tax rates, it will promote working families with children.
But McCain also proposes marginal tax rate reductions that do promote economic growth and encourage investment. Because America today suffers from the second highest corporate tax rates in the industrialized world, McCain would help restore American competitiveness by reducing the federal corporate tax rate from 35 percent to 25 percent. This would benefit the middle class and workers by creating new jobs, at better wages, while strengthening the dollar.
It may even raise rather than reduce revenues. According to a 2007 study by the Treasury Department, Ireland -- with a 12.5 percent corporate tax rate -- raises almost 50 percent more revenue on a comparative basis than the United States does with a 35 percent rate.
McCain would also hold the top capital gains tax rate and dividend tax at 15 percent. Both of these would provide a much-needed boost for the value of stocks, which are now held by more than two-thirds of all Americans.