Obama's and McCain's tax plans fall along party lines

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WASHINGTON -- Sens. Barack Obama and John McCain offer voters a stark if orthodox choice on the economy, but according to experts, intense new budget pressures -- including military costs and health care spending -- could render economic orthodoxy outdated."Everyone knows we're entering a difficult fiscal environment, and neither of the candidates have dealt with it in a serious way at all," said Steven Sheffrin, an economist and dean of social sciences at the University of California, Davis.Democrat Obama would sharply skew tax cuts and spending toward lower-income people and social programs. Republican McCain would just as sharply tilt policy toward upper-income classes and business investment.Strains on the economy are hitting middle-class pocketbooks in ways not seen since Jimmy Carter lost to Ronald Reagan in 1980.Central to the debate are President Bush's $3.6 trillion in tax cuts, which expire in 2010. That means the next president will have to propose new tax laws upon taking office in 2009. As much as Obama blasts the Bush tax cuts, he would expand large portions of them, promising even more tax cuts for middle- and lower-income groups.Taxes would fall most sharply for lower-income groups while rising sharply for top earners, according to a new analysis by the Tax Policy Center, a joint think tank of the center-left Brookings Institution and Urban Institute.Obama's campaign contends that no one earning less than $250,000 a year would see any tax increase.For those earning more than $250,000, taxes could rise to levels not seen in decades. If Obama imposes higher Social Security payroll taxes on top income earners, as he has suggested, they could see an effective tax rate of more than 55 percent of their income, not counting state income taxes, the Tax Policy Center analysis showed.Taxes on the top 0.1 percent of filers would rise by nearly $790,000 under Obama's plan."The increase in taxes is on about 3 percent of the tax population in the Obama plan, and that 3 percent are in the top two brackets," said Robertson Williams, a co-author of the analysis.McCain goes in the opposite direction.He now embraces the Bush tax cuts that he once voted against, aligning himself with GOP tax orthodoxy.He would make the Bush tax cuts permanent, leaving in place all the middle-and lower-income tax cuts Obama wants to expand, but keeping the lower Bush rates on top income earners and the reduction in capital gains and dividends taxes to 15 percent. McCain would also slash the corporate tax rate from 35 percent to 25 percent, and phase out the alternative minimum tax, which hits upper-income groups.That skews the tax cuts heavily toward business income and high-earning groups. Most people would see little change in their taxes, but the top 0.1 percent of income earners would see taxes fall by more than $190,000, the Tax Center analysis showed.The plan would reduce revenue by $600 billion over 10 years.McCain's plans to cut spending by eliminating earmarks and "corporate welfare" would not come anywhere near to closing the budget gaps left by his tax cuts.McCain also supports a continuation of the Iraq war, which last year cost $170 billion."I think it's just unrealistic to propose the kinds of things McCain is proposing," said Bruce Bartlett, who served in the Reagan and George H.W. Bush administrations.Obama wants to end the Iraq war while rebuilding the military and shifting spending to the war in Afghanistan.His tax cuts are designed to use the tax code as social policy -- subsidizing education, child care and low-income seniors, using the tax code as social policy. While cutting taxes for low-income seniors, the Obama plan would raise taxes on retirees who depend on investment income from capital gains and stock dividends, the Tax Policy Center analysis noted.Republicans see a big opening on Obama's plan to raise capital gains and dividends taxes."He's running a 1930s campaign because he doesn't think anyone's in the stock market," said Grover Norquist, an anti-tax crusader who heads Americans for Tax Reform and works closely with Republicans. Unlike a majority of adults, Obama does not have a 401(k) or IRA, Norquist said."So this middle class he's talking about ... have 401(k)s and he wants to screw them by reducing the value of their stock portfolios by having these massive tax increases," Norquist said.(E-mail Carolyn Lochhead at clochhead(at)sfchronicle.com)(Distributed by Scripps Howard News Service, www.scrippsnews.com.)