The Great Corporate Tax Heist 

     Posted August 12, 2008 | 02:52 PM (EST)

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The Budget According to McCain: Part I

May 13, 2008

Updated: May 16, 2008

Think it's all about cutting earmarks? Think again.

Summary

McCain’s big promise is that he can balance the budget while extending Bush’s tax cuts and adding a few of his own. He likes to leave the impression that this can be done painlessly, for example, by eliminating "wasteful" spending in the form of “earmarks” that lawmakers like to tuck into spending bills to finance home-state projects. We found that not only is this theory full of holes, it's not even McCain's actual plan. In this story we examine the spending-cut side of McCain's budget program. In Part II, we'll look at what McCain has said about taxes.

McCain's pronouncements on cutting spending, and even on the growth in the size of the federal government, are dubious at best:

• With earmarks out as a potential source of savings, McCain hasn't said what he'd cut out of the discretionary budget to get to $100 billion. He's even indicated that defense spending might increase. If defense spending is off the table, saving $100 billion would require 18.5 percent across-the-board cuts in every other discretionary program, including things like elementary and secondary education, veterans' health benefits and highway construction. The alternative would be severe cuts in a few programs, as yet unnamed. 

• McCain says that "just in the last few years" the government has puffed up "by 40 percent, by trillions." Actually, it has taken federal spending a decade to grow 40 percent, and even longer to grow by "trillions." In inflation-adjusted dollars, federal spending is projected to come to $2.45 trillion in fiscal 2009, including $1.4 trillion for Social Security, Medicare, military spending and veterans programs. The last time the budget was "trillions" smaller was 1951.

Update, May 16: In our original article, we did not specify in the summary that the $2.45 trillion in federal spending is measured in inflation-adjusted dollars, with 2000 as a baseline. Also, we have changed the summary to reflect that the estimate is for fiscal year 2009, as we say in the Analysis section; the spending levels are still being developed by Congress.

Also, we should not have said that student loans were part of the discretionary budget, as we did originally. They are not. And we have changed the term "assistance to veterans" to be more specific, since some veterans programs are mandatory and some are discretionary.

Analysis

Beginning, appropriately enough, with an April 15 speech, presumptive Republican presidential nominee John McCain began unveiling a series of economic proposals. He elaborated on his plan in an April 16 interview with Andrea Mitchell on MSNBC and again in an April 20 appearance on "This Week with George Stephanopoulos" and has continued repeating many of his claims on the stump. In the first of our two-part article on McCain's budget and tax proposals, we look at his plan to reduce government spending.

McCain's Earmark Sleight-of-Hand

The McCain campaign has been vague about where, exactly, the candidate will cut spending. But one theme has emerged consistently: McCain will save money by eliminating earmarks:

McCain (April 15): I will veto every bill with earmarks, until the Congress stops sending bills with earmarks. ... The great goal is to get the American economy running at full strength again. ... And one very direct way to achieve that is by taking the savings from earmark, program review, and other budget reforms.

McCain (April 16): I can show you $35 billion just in the last two years of pork-barrel projects that should be eliminated that would certainly help pay for a lot of that [proposed tax cuts]. And $65 billion that's already on the books.

McCain (April 20): "Two years in a row, last two years, the president of the United States has signed in a law, two big-spending, pork-barrel-laden bills worth $35 billion. That increases the budget, the baseline of the budget. In the years before that, $65 billion. You do away with those, there’s $100 billion right there, before you look at any agency of government."

McCain is apparently claiming that he can save $100 billion simply by eliminating earmarks, past and present. Let's start with a simple overview of earmarks, which are line items inserted by lawmakers into legislation funding the federal government. Estimates of earmarked spending vary. For fiscal 2008, the budget watchdog group Taxpayers for Common Sense said there was $18.3 billion earmarked in spending bills. Citizens Against Government Waste came in at $17.2 billion. The Office of Management and Budget tallied earmarks at a mere $16.9 billion. In 2006, the Congressional Research Service, which used a different definition of "earmark" for each of the 11 spending bills it studied in that year, came up with over $67 billion.

But contrary to popular belief -- this is the first of several bits of information readers may be surprised by -- cutting earmarks wouldn't necessarily cut government spending, according to independent budget experts from across the political spectrum. Jeff Patch, a budget fellow at the libertarian Cato Institute (and also a former McCain volunteer) told FactCheck.org that "earmarks just direct funds from executive agencies to specific projects or companies." That is, while there are still a few pet projects slipped into legislation in the dark of night that do increase the federal budget, earmarks often simply tell agencies how to spend money that they are already getting. So while earmarks may drive up the cost of government slightly (by, for example, awarding no-bid contracts in a legislator's home district), cutting earmarks alone is "not sufficient for cutting wasteful spending," Patch said. The Brookings Institution's Paul Cullinan, research director of the Budgeting for National Priorities Project, agrees, saying that earmarks "might be an allocation issue" rather than a spending issue. And Scott Lilly, a senior fellow with the liberal Center for American Progress, told us that "there’s no evidence that if you took earmarks out, federal spending would go down."

And (surprise #2) McCain now says that many earmarks aren't really wasteful spending at all. For example, in 2006 the Congressional Research Service counted 75 percent (or $15.7 billion) of the 2006 foreign operations budget as earmarks. That figure includes $4.3 billion in aid to Israel and Egypt. Another $16.1 billion was earmarked for military construction and veterans affairs, and $9.4 billion more was earmarked for defense spending. That's $41 billion – or more than two-fifths of the amount of earmark spending McCain cites. But McCain has no plans to cut those particular earmarks. Douglas Holtz-Eakin, McCain's chief economic adviser, told FactCheck.org that "if you don't have earmarks, a lot of those things would be funded under regular order, if they have merit."

So if all this savings isn't coming from earmark cuts, then where will it come from? Holtz-Eakin tells us (surprise #3) that it will come from cuts in the annual budget:

Holtz-Eakin: So what he’s talked about is going forward, just not signing bills that have earmarks in them, period. That’s his pledge. And then, also going forward, cut discretionary spending, and that’s simply a pledge to reduce the amount of spending. And it’s not that it’s going to be tied to going back to specific projects that began as earmarks. It’s that we’re going to scrub defense, non-defense spending alike, reform procurement, evaluate programs, take the time-out, the one-year pause, and look at everything and then cut the budget going forward. Which, ultimately, hopefully, we’ll get $100 billion out of the annual baseline.

When we asked specifically whether the $100 billion in spending cuts had anything to do with eliminating earmarks, Holtz-Eakin told us: "It can't. I mean, by definition, every dollar is up for grabs every year."

So McCain's boast that he can save $100 billion "before you look at any agency of government" is flatly false. His economic adviser tells us that budget cuts cannot, "by definition," arise simply by eliminating earmarks. Instead, McCain's plan is to scrub $100 billion from the discretionary budget. And those cuts are not at all linked up to past earmark spending.

McCain's attempt to conflate earmark reform with budget cuts is a bit of logical sleight-of-hand (a formal logical fallacy that philosophers call an undistributed middle). McCain's argument is that:

1. The McCain economic plan will cut $100 billion of the discretionary budget.

2. Past and present earmarks account for $100 billion of the discretionary budget.

3. Therefore, the McCain economic plan will cut past and present earmarks.

The McCain campaign has been pretty vague about just what will be cut. Holtz-Eakin told us only that the cuts "will have to come from across-the-board review" of discretionary spending. Campaign spokesperson Brian Rogers told us that McCain is willing to cut defense spending on "expenditures not included in the Administration’s budget or identified as a priority” to "conduct the War on Terror and defend our great nation." Indeed, McCain has pledged to overhaul the defense procurement process in order to eliminate wasteful spending.

But McCain specifically exempted military spending from his pledge to freeze increases in the discretionary budget, and he has called for increasing the total size of the military. So McCain’s promises to reform the military procurement process and cut unnecessary spending don't mean saving money to fund tax cuts; it's more like taking the funds out of one defense budget pocket and putting them in another. We’re all for spending efficiently, but getting more out of each dollar while spending even more of them is very different from saving money. It’s a bit like a husband who tells his wife that he saved them hundreds of dollars because he bought a new plasma TV on sale.

The non-defense side of the discretionary budget totals around $540.8 billion. So even if McCain's defense budget doesn't get any bigger, he'd still be looking at convincing Congress to slash 18.5 percent of the funding for everything else in the discretionary budget -- things like veterans' health benefits, highway construction, elementary and secondary education, and immigration services. Or he could make much deeper cuts in just a few programs. He's leaving vague exactly how he'd accomplish the goal, saying he first wants to do a thorough review of government programs after he's elected.

A Trillion Here, a Trillion There

At a more fundamental level, McCain seriously overstates the rate at which the size of government has grown.

McCain (April 20): My friend, we have increased the size of government by some 40 percent just in the last few years. By some 40 percent, by trillions. By trillions, we have increased the size of government.

The size of the budget has increased by 40 percent, but McCain exaggerates in saying that has happened “in the last few years.” According to the Office of Management and Budget, after adjusting for inflation, federal expenditures increased by 40 percent between 1999 and 2009. But 40 percent doesn't represent an increase of "trillions." Measured in inflation-adjusted dollars, total expenditures in 2009 are expected to be about $2.45 trillion. The last year that the budget was "trillions" smaller: 1951. Even without adjusting for inflation, it has been 21 years since the budget was trillions smaller. To our ears, 21 seems like more than a "few years." And 58 sounds like rather a lot.

But McCain wasn’t finished with his trillion-dollar exaggerations. A few moments later, he added:

McCain (April 20): So why would you not think that if we stopped that increase in the size of government, in the form of a $1 trillion or so, that we can’t balance the budget?

It’s certainly true that cutting spending by $1 trillion would result in a balanced budget. Of course, the total discretionary budget (including the entire defense budget) is just a little more than $1.2 trillion, so McCain just has to convince Congress to slash discretionary spending by 83 percent. Alternatively, McCain could convince Congress to couple more modest cuts in discretionary spending with deep reductions in popular programs like Social Security and Medicare. Historically, wagers that either of those things would happen have been imprudent investments.

– by Joe Miller, with Viveca Novak

It Was Bound To Happen - Just Like Republicans Have Always Done, They Fabricate Stories to Make Democrats Look Bad.

Right after Senator Obama returned from his trip to Afghanistan, a lie written by a soldier in Afghanistan was circulating around the blogs.  The soldier, CPT Jeffrey S. Porter, Battle Captain, TF Wasatch, claimed that Senator Obama "got off the plane and got into a bullet proof vehicle...As the Soldiers where lined up to shake his hand he blew them off and didn't say a word as he went into the conference room to meet the General...."

Snopes.com dug into the story and proved that it was FALSE.

http://www.snopes.com/politics/obama/afghanistan.asp

This is just one of the latest chain email smears that are being used against Senator Obama.

According to an Army Spokesperson quoted in the New York Daily News:

"These comments are inappropriate and factually incorrect," said Bagram spokeswoman Army Lt. Col. Rumi Nielson-Green, who added that such political commentary is barred for uniformed personnel.

In a follow-up Blog entry, the Daily News reported that the e-mail's author has recanted his original message:

Now he is asking that everyone delete the email and not forward it on, claiming that after checking his sources, he found that the information that he put in his email was wrong. 

Unfortunately, anyone not reading the retraction will still have the same negative perception of him.

In addition to the official military denials, a Department of Defense video shows Senator Obama meeting, talking, and eating breakfast with U.S. troops in Afghanistan (and includes a brief interview with a soldier who noted that Obama "took time out of his schedule to come over and visit with us, not just at this camp but at other surrounding camps in Afghanistan.")

Snopes also received a flood of messages from U.S. troops who met Senator Obama in his Middle East trip in Afghanistan and elsewhere, who reported quite different experiences than CPT Jeffery Porter, including a letter from another soldier who says that CPT Porter wasn't even there.

Another wrote: "I don't know who this captain saw, but it wasn't the Barack Obama I just saw in Afghanistan.  Unlike most of the pols who breeze on through for nothing more than brief photo ops before leaving he was warm, friendly & engaging (as much as security would allow) with the troops he met and he was genuinely interested in us and our mission and how we could best serve our country.  When Obama went to Jordan a few days ago they said "The guy gets it.  Sharp, aware and a very good listener.  He doesn't seem stuck in any preconceived positions."

Those are the qualities I'd like to see in my Commander in Chief.  While Obama was out visiting the troops, what was John McCain doing...?, playing golf with his rich cronies (Bush Sr.) in Kennebunkport and whining about how much press coverage Obama was getting.  Definitely "not" the qualities I want to see in my Commander in Chief."

Sources

Citizens Against Government Waste. "CAGW's Pig Book Digs up $17.2 Billion in Pork." 2 April 2008. Citizens Against Government Waste, 8 May 2008.

CRS Appropriations Team. "Earmarks in Appropriation Acts: FY1994, FY1996, FY1998, FY2000, FY2002, FY2004, FY2005." 26 January 2006. Congressional Research Service, 8 May 2008.

CRS Appropriations Team. "Earmarks in FY2006 Appropriations Acts." 6 March 2006. Congressional Research Service, 9 May 2008.

McCain, John. "A Strong Military in a Dangerous World." 7 May 2008. JohnMcCain.com, 9 May 2008.

McCain, John. "Senator McCain Addresses the Oklahoma State Legislature on Government Reforms." 21 May 2007. JohnMcCain.com, 8 May 2008.

Lilly, Scott. "McCain Pulls Rug Out From Under Israel." 16 April 2008. Center for American Progress Action Fund, 9 May 2008.

Office of Management and Budget. "FY 2008 Appropriations Earmarks Summary." 28 January 2008. Office of Management and Budget: Earmarks, 8 May 2008.

Office of Management and Budget. "Historical Budget Tables, FY2009." 4 February 2008. The White House: Office of Management and Budget, 1 May 2008.

Taxpayers for Common Sense. TCS Database of FY08 Earmarks. 12 March 2008, 1 May 2008.

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Washington Post Fact Checker: 4 Pinocchios for McCain's "Fantasy" Plan to Balance Budgets by Cutting Earmarks.

"McCain's talk about eliminating $100 billion a year in earmarks is largely fantasy. His advisers are now promoting amore realistic plan of eliminating $100 billion in overall spending. But it is difficult to take even that promise very seriously given the fact that the senator refuses to identify exactly which projects he will be cut. To use a phrase coined by George H.W. Bush, this is 'voodoo economics,' based more on wishful thinking than on hard data or carefully considered policy proposals." [Washington Post, Fact Checker Blog, 5/23/08: http://blog.washingtonpost.com/fact-checker/2008/05/mccains_fantasy_war_on_earmark.html]

Candidate Watch

McCain's Fantasy War on Earmarks

Portland, OR, May 12, 2008.

"I can eliminate $100 billion of wasteful and earmark spending immediately--35 billion in big spending bills in the last two years, and another 65 billion that has already been made a permanent part of the budget."
--John McCain, NPR All Things Considered, April 23, 2008.

John McCain boasts that he can save $100 billion a year "immediately" by eliminating the so-called earmarks that legislators attach to spending bills to finance pet projects, usually in their home state. But he has refused to say exactly which projects he would cut, and his estimates of the amount of money that is being spent on earmarks have been challenged by independent experts.

The Facts

The Arizona senator is promising to balance the budget by the end of his first term, while simultaneously extending the George W. Bush tax cuts, introducing billions of dollars of new tax cuts of his own, and remaining in Iraq as long as is necessary to stabilize that country. Asked how this miracle will be accomplished, McCain told George Stephanopoulos of ABC News This Week on April 20 that he could come up with $100 billion "tomorrow" by vetoing pork-barrel spending bills.

Here's $100 billion right here for you, George. Two years in a row, the last two years, the president of the United States has signed into law two big spending, pork barrel-laden bills with $35 billion (in earmarks). In the years before that, $65 billion. You do away with those, there's $100 billion right before you look at any agency.

Pouff! $100 billion in taxpayer money! Saved! Just like that! With a flick of the presidential veto pen!

There are a number of problems with this magical budgetary balancing act. First of all, the suspiciously round $100 billion figure is largely a figment of the McCain campaign's imagination. I have not been able to find a single independent budget expert to vouch for it. McCain's economics adviser, Doug Holtz-Eakin, will not say how the campaign arrived at the figure, other than that it is an extrapolation from various studies, including a 2006 study by the Congressional Research Service available here.

The CRS study breaks down earmarks by different government departments, without giving a global figure. According to Scott Lilly, a former Democratic appropriations staffer now with the Center for American Progress Action Fund, the CRS study identifies a total of $52 billion in earmarks for a single year. However, much of this money is tied to items such as foreign aid to countries like Israel, Egypt, and Jordan, that McCain says he will not touch.

By most definitions of the term, the amount of money spent on earmarks is much lower than the CRS study. The Office for Management and the Budget came up with a figure for $16.9 billion in the 2008 appropriation bills. Taxpayers for Commonsense, an independent watchdog group that focuses on wasteful spending, identified $18.3 billion worth of earmarks in the 2008 bills, a 23 per cent cut from a record $23.6 billion set in 2005.

How much of this $18.3 billion could be eliminated is a "difficult question that we have not yet figured out," said Taxpayers for Commonsense vice-president Steve Ellis. The figure includes such items as $4 billion for the U.S. Army Corps of Engineers, which could not be eliminated without halting hundreds of construction projects around the country. Another big chunk goes to military construction, including housing for servicemen and their families, which McCain has also promised not to touch.

Bruce Riedl, a budget analyst with the Heritage Foundation, says it might be possible to eliminate roughly half the expenditure on earmarks every year, i.e. around $9 billion, using the Taxpayers for Commonsense figures. He identified $5 billion in Community Development Block Grant funds, most of which goes to local governments, as a prime target for cuts. Even if earmarks were eliminated altogether, many other expenditures would have to be shifted to other parts of the budget.

Like other analysts, Riedl was mystified by McCain's argument that previous year's earmarks automatically become a "permanent part of the budget." "I don't understand how they come up with that," he told me.

Excluding those programs McCain has promised to preserve, the draconian slashing of earmark expenditures might save around $10 billion a year. But that is still a long way from the $100 billion in savings that McCain says that he can identify "immediately."

The McCain camp now says that the senator never meant to suggest that his proposed $100 billion in savings would all come from earmarks. Holtz-Eakin told me that McCain had simply promised to cut overall spending by around $100 billion. Some of these savings will come from earmarks, some from other parts of the budget. He declined to identify which specific projects would be cut.

Asked whether McCain had misspoke or whether he had been misunderstood in his focus on eliminating earmarks, Holtz-Eakin replied: "a bit of both."

The Pinocchio Test

McCain's talk about eliminating $100 billion a year in earmarks is largely fantasy. His advisers are now promoting a more realistic plan of eliminating $100 billion in overall spending. But it is difficult to take even that promise very seriously given the fact that the senator refuses to identify exactly which projects he will be cut. To use a phrase coined by George H.W. Bush, this is "voodoo economics," based more on wishful thinking than on hard data or carefully considered policy proposals.

TAX CUTS

Washington Post Fact Checker: 2 Pinocchios for Fiorina and McCain Tax Claims.

"The McCain camp is attempting to persuade Americans that their taxes will increase dramatically with Barack Obama as president. The presumptive Republican nominee has repeatedly said that Obama would enact 'the largest tax increase since the Second World War.' A surrogate, former Hewlett-Packard CEO Carly Fiorina, insists that Obama has not proposed 'a single tax cut' and wants to 'raise every tax in the book'... Carly Fiorina is wrong to claim that Obama has proposed no tax cuts and wants to raise 'every tax in the book.' John McCain is on more solid ground when he claims that Americans from many different backgrounds could be affected by a rise in capital gains taxes, but he has greatly exaggerated the adverse impact." [Washington Post, Fact Checker blog, 6/11/08: http://blog.washingtonpost.com/fact-checker/2008/06/mccain_vs_obama_on_taxes.html]

Candidate Watch

McCain vs Obama on taxes

Washington D.C., June 10, 2008.

"Under Senator Obama's tax plan, Americans of every background would see their taxes rise--seniors, parents, small business owners, and just about everyone who has even a modest investment in the market."
--John McCain, National Small Business Summit, Washington D.C. June 10, 2008.

The McCain camp is attempting to persuade Americans that their taxes will increase dramatically with Barack Obama as president. The presumptive Republican nominee has repeatedly said that Obama would enact "the largest tax increase since the Second World War." A surrogate, former Hewlett-Packard CEO Carly Fiorina, insists that Obama has not proposed "a single tax cut" and wants to "raise every tax in the book."

The Facts

There are significant differences between the two candidaes on tax policy. McCain would like to make the Bush tax cuts of 2001 and 2003 permanent, and has proposed a few more of his own. Obama, by contrast, favors allowing the tax cuts to expire as scheduled for Americans earning more than $250,000 a year. He would raise taxes on capital gains and dividends, but has also promised tax breaks for low and middle-income Americans.

McCain's speech to the Small Business Summit yesterday leaves the impression that Obama favors raising taxes on all Americans, across the board. But his words have been carefully parsed. A more literal reading suggests that he could also be talking about some Americans from "every background," not "all Americans." The key issue is how many low and middle-income Americans would be affected by the Obama tax increases.

In order to substantiate its claim that large numbers of ordinary Americans will be worse off under the Democrats, the McCain camp points to an Obama proposal to raise tax rates on dividends and capital gains. Obama advisers argue that any tax increases will be offset by credits for lower-income families. They also point out that most middle and low-income families invest in the market through 401 (k) plans that are exempt from capital gains taxes.

Maya MacGuineas, a budget expert at the New America foundation, says that the McCain camp is trying to create an exaggerated impression of the number of people from low and middle-income groups who will be adversely affected by the Obama tax proposals. "It is legitimate to say that they can find a cleaning person or a waitress somewhere who will be affected, but the numbers should not be overwhelming," she said.

The claim that Obama will "enact" the largest tax increase since World War II is also overblown. The Bush tax cuts will expire automatically at the end of 2010, so it is hardly a question of "enacting" a new tax increase. According to Obama's new economics adviser, Jason Furman, the revenues raised from letting the tax cuts expire will be returned to middle and low-income tax payers in the form of tax credits to pay for health insurance, so the overall effect will be revenue neutral.

McCain spokesman Brian Rogers pointed to an analysis by the non-partisan Annenberg Political Fact Check that found that the gross tax increase would amount to $103.3 billion in 2011, the largest single-year tax increase since World War II. The Annenberg study pointed out, however, that "most economists" prefer to measure tax changes as a percentage of gross national product, in which case it would be the fifth largest increase since 1943.

According to Brookings economist Douglas Elmendorf, the Obama plan will eliminate income taxes for 10 million Americans. "It's very clear that taxes for lower income Americans will decline under Obama," he said.

The Pinocchio Test

Carly Fiorina is wrong to claim that Obama has proposed no tax cuts and wants to raise "every tax in the book." John McCain is on more solid ground when he claims that Americans from many different backgrounds could be affected by a rise in capital gains taxes, but he has greatly exaggerated the adverse impact.

FactCheck.org: McCain's Claim That Tax Cuts Increase Revenue Is

"Highly Misleading."

Republican presidential candidate Sen. John McCain has said that the major tax cuts passed in 2001 and 2003 have "increased revenues." He also said that tax cuts in general increase revenues. That's highly misleading. In fact, the last half-dozen years have shown us that we can't have both lower taxes and fatter government coffers. The Congressional Budget Office, the Treasury Department, the Joint Committee on Taxation, the White House's Council of Economic Advisers and a former Bush administration economist all say that tax cuts lead to revenues that are lower than they otherwise would have been - even if they spur some economic growth. And federal revenues actually declined at the beginning of this decade before rebounding. The growth in the past three years that McCain refers to brings revenues back in line with the 40-year historical average as a percentage of gross domestic product." [Fact Check.Org, 6/11/2008]


FactCheck.org: McCain's Largest Tax Increase Charge "Wrong" and "Misleading."

According to the Annenberg Public Policy Center's Factcheck.org: "By the measure most economists prefer, McCain is wrong in his claim that Sens. Clinton and Obama want to implement 'the single largest tax increase since the Second World War;'... At a more basic level, it's misleading to tag Clinton and Obama for something that was scheduled during the Bush administration - the expiration of the 2001 and 2003 Bush tax cuts, which by law will occur at the end of 2010." [Factcheck.org, 5/14/2008, http://www.factcheck.org/elections-2008/the_budget_according_to_mccain_part_ii.html]

The Budget According to McCain: Part II

May 14, 2008

The new McCain loves tax cuts. But many of his claims about them are off.

Summary

In our last installment we looked at McCain's pronouncements on spending cuts to help balance the budget. In Part II, we examine what he's said on a subject that might be more pleasing to many Americans: lowering taxes. We found exaggerations and distortions here, as well.

• McCain says that eliminating the Alternative Minimum Tax will save "more than 25 million middle-class families more than $2,000 every year." But McCain's "middle class" includes families making up to $200,000 per year, and the $2,000 figure is an average. Those earning more money will see the lion's share of the savings. McCain also leaves out the fact that the proposal could cost as much as $1.6 trillion over 10 years.

• By the measure most economists prefer, McCain is wrong in his claim that Sens. Clinton and Obama want to implement "the single largest tax increase since the Second World War;" it would be the fifth largest. At a more basic level, it's misleading to tag Clinton and Obama for something that was scheduled during the Bush administration – the expiration of the 2001 and 2003 Bush tax cuts, which by law will occur at the end of 2010.

• McCain also repeats the mantra that cutting the capital gains tax rate will increase government receipts. In fact, rate cuts produce a spike in revenue, but it's only temporary. McCain also falsely claims that higher capital gains tax rates will affect 401(k) plans.

• McCain was the first to announce the now widely discredited proposal to suspend federal gas taxes. The proposal wouldn't lower prices at the pump and would result in (effectively) an $8.5 billion windfall to oil companies.

Analysis

In an April 15 speech, McCain unveiled a set of proposals that he says would reduce spending, lower taxes and still leave the government with enough money to balance the budget. We've already tackled McCain's pledge to cut discretionary spending by $100 billion. In this second part, we examine his plan to lower your taxes.

Alternative Middle-Class Cuts

McCain says his plan to eliminate the Alternative Minimum Tax (AMT) would be a "middle-class tax cut." That depends on what your definition of "middle class" is.

McCain (April 15): “I will also send to the Congress a middle-class tax cut – a complete phase-out of the Alternative Minimum Tax to save more than 25 million middle-class families more than 2,000 dollars every year.”

Douglas Holtz-Eakin, McCain's economic adviser, confirms that the senator is referring to taxpayers making up to $200,000 a year. According to projections by the Tax Policy Center (TPC), 26.6 million of those paying the tax in 2010 will make up to $200k, while 5.8 million will make more than that. TPC figures also show that the majority (64 percent, or 20.9 million) of AMT taxpayers in 2010 will earn more than $100,000 a year. The AMT was originally devised in 1969 after 155 taxpayers with incomes over $200,000 escaped paying any federal income taxes. But because the tax isn't indexed to inflation, it has been affecting a greater percentage of taxpayers in most income classifications each year; that $200,000 threshold would be worth $1.2 million in today's dollars. Bush's tax cuts have caused the AMT to affect more people than it otherwise would: Taxpayers are subject to the AMT when the amount they owe under the "regular" tax system dips below the amount they would pay under the AMT, so cuts in the regular tax rate can actually increase the number of people who must pay the AMT. In fact, the estimated percentage of taxpayers subject to the AMT will have more than doubled in 2010 because of the Bush tax cuts.

Holtz-Eakin also told FactCheck.org that the families to which McCain refers would save an average of $2,000 a year. That means some would save more and some would save less. Those in higher income groups pay much more of AMT taxes than do those with lower earnings, and they would reap more of the benefits of repealing the tax as well. About 90 percent of the tax benefits of doing away with the AMT in 2007, for instance, would have gone to households in the $100k and above group; 55 percent would have gone to households earning more than $200k. We've charted the Tax Policy Center's data on who will pay the AMT in 2010 and how much of the AMT tax burden they'll bear:

The TPC projects that 32.4 million taxpayers will pay the AMT in 2010. As the chart shows, 46.6 percent of them will earn between $100,000 and $200,000 that year. Those with higher incomes pay more of the tax. For instance, nearly 22 percent of AMT taxpayers in 2010 will make between $75,000 and $100,000, but they'll pay 7.7 percent of AMT taxes. Those making $200k to $500k represent just 15 percent of all AMT taxpayers, but they pay nearly 40 percent of all AMT taxes.

McCain also fails to mention that repealing the AMT costs the government a lot of money in lost revenues. According to the TPC, nixing the AMT would cost more than $850 billion over 10 years, if the Bush tax cuts expire as scheduled. If the tax cuts are extended, eliminating the AMT would cost $1.6 trillion over 10 years.

Doing away with the AMT would certainly be a tax cut for wealthy individuals – and others affected by the tax. As for whether it rightly can be called a "middle-class tax cut," as McCain says, we'll let you be the judge. We’ve written before about how the majority of Americans consider themselves to be middle class.

Speaking of Those Bush Tax Cuts...

The senator also repeated his opposition to letting Bush's tax cuts expire, a reversal of his previous position on the cuts:

McCain (April 15): By allowing many of the current low tax rates to expire, [Democrats] would impose – overnight – the single largest tax increase since the Second World War. Among supporters of a tax increase are Senators Obama and Clinton. Both promise big "change." And a trillion dollars in new taxes over the next decade would certainly fit that description.

Actually, there’s nothing "new" about most of these taxes. As we’ve noted before, Bush’s major 2001 and 2003 tax cuts are set to expire at the end of 2010. It’s a bit misleading to say that not changing the current law would be enacting a tax hike.

Both Sens. Obama and Clinton have said they would extend some of the Bush tax cuts but allow those that apply to people making more than $250,000 a year to expire. (Just 2 percent of U.S. households are projected to earn more than $250,000 next year, according to the TPC.) While there’s some guesswork about how their policy pronouncements would play out, the TPC has calculated that under a scenario like the one the Democratic contenders have suggested, Americans would pay $1.1 trillion more in income and estate taxes over 10 years than they would if all 2001-2006 tax cuts were extended and the estate tax was repealed permanently. Put another way, that means that extending all of the reductions and eliminating the estate tax would lower government revenues by about $1.1 trillion more than the Democratic proposal. To be fair, McCain has said he wouldn't eliminate the estate tax, but raise the exemption and cut the rate.

McCain also calls the Democratic plan to let some of the Bush cuts expire "the single largest tax increase since the Second World War." That’s true when measured in inflation-adjusted dollars, a comparison that a U.S. Treasury study calls "the second best measure." Since McCain said the increase would happen "overnight," we looked at the effect in the first year of the tax changes. The TPC found that taxpayers would pay an additional $103.3 billion in 2011, the first year a Democratic plan would be implemented. In inflation-adjusted dollars, that would be the largest single-year tax increase since WWII.

But most economists prefer to measure tax changes as a percentage of gross domestic product, which takes into account changes in the size of the overall U.S. economy. The Congressional Budget Office projects the GDP will be $16.7 trillion in 2011, which means the tax change would be six-tenths of 1 percent of GDP. By that measure, this plan would be the fifth-largest increase enacted since 1943. Looking at the effect of tax increases as an average of the first two years, this one would be the third largest since 1968.

McCain’s Supply-Side Myth

McCain says that not all of his tax cuts will cost the government money. He continues to repeat the suspect claim that cutting the capital gains tax rate will actually increase government revenue.

McCain (April 20): Sen. Obama says that he doesn’t want to raise taxes on anybody over – making over $200,000 a year, yet he wants to nearly double the capital gains tax. Nearly double it, which 100 million Americans have investments in – mutual funds, 401(k)s – policemen, firemen, nurses. He wants to increase their taxes. And he [Obama] obviously doesn’t understand the economy, because history shows every time you have cut capital gains taxes, revenues have increased, going back to Jack Kennedy.

Obama doesn't understand the economy? What about the giant blunder of clearly implying that 401(k) funds are subject to capital gains taxes? That's simply not the case: Those retirement funds are taxed as income when they are drawn down. (If the money is withdrawn before the plan participant is 59 1/2 years old, a penalty must also be paid unless the money is used for certain purposes.)

Also, Obama hasn't quite said he "wants to nearly double the capital gains tax" rate. What he said, in a CNBC interview, was this:

Obama (March 27): And I certainly would not go above what existed under Bill Clinton, which was the 28 percent. I would – and my guess would be it would be significantly lower than that.

Then there's the matter of whether capital gains tax cuts trigger revenue increases. We’ve addressed this distortion before, most recently when ABC News moderator Charles Gibson made a similar claim during a Democratic debate. Like Gibson, McCain is partly right. Revenues do tend to increase immediately following a cut in the capital gains tax rate. Because capital gains (or earnings on gains in stocks or real estate) are taxed only when the asset is sold, many investors will hold on to their assets until lower tax rates take effect, then rush to the "sell" window. But the spike in income to the federal government is temporary. A 2002 Congressional Budget Office study found that the effect wears off after a year or two. The report concluded that cuts to the capital gains tax rate "may not be enough to produce additional receipts over a long period" but "may do so over a few years."

For the record, Obama has said he doesn't want to raise taxes for anyone making less than around $200,000 per year; McCain appears to have made a verbal typo when he said "over $200,000."

The Gas Tax Pander

McCain also pledged to temporarily lift the 18.4 cents per gallon federal tax on gasoline (24.4 cents on diesel).

McCain (April 15): I propose that the federal government suspend all taxes on gasoline now paid by the American people – from Memorial Day to Labor Day of this year. The effect will be an immediate economic stimulus – taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up.

We've written about this one before. In fact, no economist thinks that McCain's gas tax holiday – or the very similar one proposed by Hillary Clinton days after McCain announced his promise – will save consumers money. Price cuts would spur greater demand for gasoline, but because the summer gas supply is already fixed, consumers would end up bidding gas back up to its old price. So motorists would pay just as much for each gallon, but 18.4 cents of each of those gallons would go to oil companies instead of the federal government. The tax currently goes directly to the Highway Trust Fund, and the American Society of Civil Engineers estimates that the holiday could siphon $8.5 billion from the fund. McCain promises to use general revenues to shore up the Highway Trust Fund, but that of course means increasing the deficit by another $8.5 billion. (Clinton would try to retrieve that money by slapping a windfall profits tax on oil companies.)

In McCain's world, everyone gets a pony: tax cuts for the middle class, higher revenue to continue all the popular government programs and the elimination of all those earmarks that no one (except their very specific beneficiaries) really likes anyway.

Unfortunately, in the world of fiscal reality, it's not so easy to dole out such generous gifts.

– by Lori Robertson, Viveca Novak and Joe Miller

Sources

Clausing, Kimberly A. "The Role of U.S. Tax Policy in Offshoring." Brainard, Lael and Susan M. Collins. Brookings Trade Forum: 2005. Washington, D.C.: Brookings Institution Press, 2006. 457-490.

Congressional Budget Office. "Capital Gains Taxes and Federal Revenues." 9 October 2002. Congressional Budget Office. 1 May 2008.

Internal Revenue Service. "401(k) Resource Guide - Plan Participants - General Distribution Rules." 1 May 2008. United States Department of the Treasury: Internal Revenue Service. 1 May 2008.

Obama, Barack. First on CNBC Interview: CNBC's Maria Bartiromo Speaks with Senator Barack Obama on CNBC's "Closing Bell" Maria Bartiromo. 27 March 2008.

Tempalski, Jerry. "Revenue Effects of Major Tax Bills." Office of Tax Analysis, U.S. Department of the Treasury, Sept. 2006.

Tax Policy Center. "AMT Participation Rate (percent) by Individual Characteristics." 29 January 2008. Tax Policy Center. 1 May 2008.

Tax Policy Center. "Distribution of AMT and Regular Income Tax by Cash Income, Current Law." 29 January 2008. Tax Policy Center. 1 May 2008.

Tax Policy Center. "Options to Limit the Extension of the 2001-06 Tax Cuts Above $250,000, Static Impact on Individual Income and Estate Tax Liability and Revenue ($ billions), 2009-18." 11 February 2008. Tax Policy Center. 1 May 2008.

Tax Policy Center. "Repealing the AMT: Costly and Regressive." 5 January 2007. Tax Policy Center. 1 May 2008.

Tax Policy Center. "AMT Revenue per AMT Taxpayer." 29 Jan. 2008. Tax Policy Center. 1 May 2008.

Burman, Len and Julianna Koch and Greg Leiserson. "The Individual Alternative Minimum Tax (AMT): 11 Key Facts and Projections." Tax Policy Center. 1 Dec. 2006. 1 May 2008.

Weisman, Jonathan. "Falling Into Alternative Minimum Trouble." 7 March 2007. The Washington Post. 1 May 2008.

Congressional Budget Office. "Backup Data for CBO's Year-by-Year Forecast and Projections for Calendar Years 2008 to 2018." 14 May 2008.

ABC News transcript. "Obama and Clinton Debate." 16 April 2008. ABC News Web site. 14 May 2008.

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