In tax policies, politics as usual

As Americans head to the polls, they carry their deep fears about the economy coupled with the weight of dire warnings about the potential economic fallout of an Obama or McCain presidency.

Democrat Barack Obama is accused of having a “socialist agenda,” and Republican John McCain allegedly wants to further enrich “millionaires and billionaires.” To listen to the campaigns, the risks for ordinary Americans are extraordinary.

The heated rhetoric is tapping into more than politics as usual. The election is occurring at a time of serious long- and short-term problems in the U.S. economy.

Ever since the late 1960s, incomes have been growing more unequal, leaving middle-class wage earners with a smaller share of the American pie while vast fortunes have been accumulated by a tiny few at the top.

The nation has just ended a long era of economic growth that left the median incomes of Americans lower in 2007 than in 1999, according to Census Bureau data. The impact was particularly hard at the lower end of the income scale.

These trends -- and how to fix them -- are at the heart of the campaign. Yet, despite the complex problems facing the nation, the detailed economic proposals both candidates have put on the table are hardly radical by historic standards.

McCain appears no more conservative on economic policy than Ronald Reagan and Obama no more liberal than Franklin D. Roosevelt -- the two ideological pillars of the last century. The overarching philosophy of the two candidates has a familiarity.

McCain does not believe the growing inequality in the American economy and the stagnant incomes of the middle class can be fixed by reducing their tax burdens, as Obama wants to do, because he believes such changes will stifle opportunity that drives growth and will create distortions that hurt business.

“The policy Obama has proposed is unlikely to result in any economic growth,” said Alex Brill, a research fellow at the conservative American Enterprise Institute for Public Policy Research. “We already have a tax code that redistributes wealth. You can’t blame the tax code for the inequality.”

Conversely, Obama does not believe that maintaining lower taxes for the wealthy and further reducing corporate income taxes, as McCain wants to do, will spur so much economic growth that it will lift the income of average Americans.

“You can’t find evidence that low tax rates foster high economic growth,” said Jared Bernstein, director of a research program at the liberal Economic Policy Institute. “In my view, Medicare, education, child care and preschool services that the government provides are going to be more necessary in the future.”

In their attacks on each other, neither candidate has issued a wholesale rejection of the twin principles of the federal tax system -- that it should be equitable and should do as little as possible to discourage the creation of wealth.

Though McCain has relentlessly attacked Obama’s statements that the Illinois senator wants to “spread the wealth” by raising taxes on high- income Americans, he has not publicly rejected the idea of a progressive tax system that requires the wealthy to pay a larger share of their income than the poor.

And though Obama has attacked McCain for wanting to reward the wealthy, he has not publicly rejected the Reagan-era economic doctrine that extremely high tax rates cause so much disruption and scheming that they ultimately hurt the middle class.

What’s more, neither candidate has placed a high priority on eliminating the staggering budget deficits that have grown during the Bush administration.

The independent Tax Policy Center has examined both candidates’ proposals and concluded that McCain would cut taxes $4.2 trillion by 2018 and Obama $2.9 trillion. Neither side could stimulate enough growth to offset those cuts, leaving a widening deficit, according to the analysis.

The longer-range issues are compounded by the gloom of the current rut. The rounds of layoffs across the nation, coupled with the plunge on Wall Street, declining home values and the credit crisis, have sent the confidence of American consumers to its lowest levels in history. It is a predicament that both candidates are trying to exploit.

“Barack Obama is a sure-fire depression,” said Douglas Holtz-Eakin, McCain’s domestic policy chief. Obama’s agenda “adds up to an unmistakable ability to turn a downturn into a disaster.”

Obama’s campaign doesn’t quite go that far, but deputy economic policy director Brian Deese said that McCain was “doubling down on the Bush administration’s failed economic policies” and that his approach is “precisely the wrong answer to the current economic crisis we face.”

Underneath the campaign trail sound bites, the two candidates have offered very detailed programs.

McCain would make permanent the tax cuts that President Bush introduced at the start of his first term and that are set to expire. He would set the tax bracket for the highest-income Americans at 35%.

The Arizona senator would also cut the corporate profit tax rate from 35% to 25%, arguing that the government’s high business taxes discourage domestic investment. In future years, he would cut in half the long-term capital gains tax, to 7.5%.

To help taxpayers with income under $50,000, McCain would double the personal exemption for dependents to $7,000 by 2016.

Holtz-Eakin said the distribution of income and wealth in the U.S. should be a concern, but it is secondary to ensuring that the economy is growing. “The problem of inequality isn’t driven by tax policy,” he said. “The driving force is skills and education. It is happening all over the world. The idea that you are going to reverse this with tax policy misses the underlying problem.”

He added, “And this is the wrong time to raise taxes at all.”

Obama proposes a wide range of tax changes. He would make most of the Bush administration’s tax cuts permanent but increase the tax brackets on the wealthiest Americans to 39.6%. He would also boost the tax rate on capital gains from 15% to 20% for high-income taxpayers.

Income tax would be eliminated for seniors with gross income of less than $50,000. For low-income workers, he proposes a “Making Work Pay” plan that would give them up to $500. For taxpayers who do not itemize their deductions but pay mortgage interest, he would offer a credit of up to $800. He would expand the child-care tax credit, making it refundable for those who don’t pay taxes.

“Typical middle-class families have trouble making ends meet,” Deese said. “That drives a lot of the economic problems we are facing. So, let’s cut their taxes directly and help them with direct needs, like college tuition and child care.”

At the same time, some independent economists accuse both candidates of dodging the most severe long-term economic problems facing the nation -- the kind of problems that could swamp any discussion of equality.

“My biggest concern with the campaign is what they did not talk about: Social Security debt, Medicare debt and public education,” said William Niskanen, a Cato Institute economist who served in the Reagan administration. “We will have big increases in taxes ahead unless we address the implicit deficits for Social Security and Medicare.”

Eugene Steuerle, vice president of Peter G. Peterson Foundation and an economist who has served in Republican and Democratic administrations, said the federal government had made promises to the American public that would be difficult to keep.

About $1 trillion a year in future spending for programs, including Medicare, Social Security, civil-service retirement benefits and veterans benefits, will not be met by future revenues, he said. “You have to vote on the basis of instinct,” Steuerle said, “because neither candidate is saying very much.”

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ralph.vartabedian@ latimes.com