January 11, 2000 01:00 PM | | Bookmark and Share

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The tax plan announced on Jan. 11 by Sen. John McCain would provide little or no benefit to the three-fifths of taxpayers who earn less than $39,000 a year; it also offers little to the one percent of taxpayers who make more than $319,000. Instead:

  • More than half of McCain’s proposed tax cuts would go to taxpayers making between $65,000 and $130,000 a year, a group that includes 15% of all taxpayers.
  • Most of the rest of McCain’s tax cuts would be divided between the 20 percent of taxpayers making between $39,000 and $65,000 (who get 21% of the cuts) and the 4 percent of taxpayers making from $130,000 to $319,000 (who get 19%).
  • Overall, the McCain plan would cut taxes by about $500 billion over ten years.

These are the results of an analysis of the McCain tax plan using the Institute on Taxation and Economic Policy’s Tax Model, and released by Citizens for Tax Justice.

Starting point for 28% tax bracket would be increased

The centerpiece of McCain’s tax cut plan would substantially raise the starting points for the 28% income tax bracket. Overall, McCain’s plan would move almost 17 million taxpayers out of the 28% bracket, cutting their top marginal income tax rate to 15%.

  • The McCain plan would increase the percentage of taxpayers in the 15% income tax bracket or below from 74.2 percent under current law to 87.4 percent.
  • Put another way, the number of taxpayers in income tax brackets higher than 15% would be cut in half, from 25.8 percent of all taxpayers to 12.6 percent.
  • Of course, by definition, raising the starting point for the 28% tax bracket offers no benefit to the three-quarters of taxpayers who are already in a lower bracket under current law.

Corporate loopholes targeted

The other key element of McCain’s tax plan is a proposal to pay for a large portion of the tax cuts with an array of corporate loophole-closing provisions, which McCain estimates would raise $151.7 billion over five years.

Comparison to George W. Bush’s tax plan

Neither the McCain tax plan nor Gov. George W. Bush’s competing, $1.7 trillion (over ten years) tax cut plan would provide much benefit to the bottom three-fifths of taxpayers. Bush assigns about 11 percent of his tax cuts to this large group of taxpayers; McCain, only about 5 percent.

Besides their huge disparity in overall size, perhaps the sharpest difference between the two plans is what they offer to people at the very top of the income scale.

  • Bush’s plan targets 36.9 percent of its tax cuts to the top one percent of all taxpayers, offering them an average tax reduction of more than $50,000 each.
  • In contrast, McCain’s plan gives only 1.8 percent of its net tax cuts to the best-off one percent. (For more details on the Bush tax plan, click here.)

mccain v. bush comparison chart

Details of the McCain tax plan:

1. Over five years, the starting points for the 28% tax bracket would be increased, from the current $43,050 in taxable income to $70,000 for couples, from $34,550 to $52,000 for single parents, and from $25,750 to $35,000 for singles without children. Note that the dollar figures refer to taxable income, so that, for example, families of four would get no benefit until their total income exceeds about $65,000 (in 1999 dollars). The full benefit would not be realized until income approaches $100,000. Because the new starting point for the 28% bracket for couples would be double the single level (although not twice the level for single parents), the change would reduce “marriage penalties” for many couples.

2. The $500 per child tax credit would be increased to $750 per child in 2001 and to $1,000 per child in 2002 and thereafter.

3. The estate tax exemption would be increased from the current $1 million to $5 million (effectively $10 million for couples), phased in over ten years.

4. Over five years, the standard deduction for couples would be increased by 19% (to twice the single amount) and for single parents by 16%. These changes would provide tax relief to many filers who take the standard deduction, as well as to some itemizers. (About 2 million current itemizers would switch to the increased standard deductions.)

5. Up to $200 ($400 for couples) in interest and dividends would be tax-exempt.

6. Limits for 401(k) plan contributions would be increased to $15,000 a year, and similar changes would be made to certain other kinds of retirement savings plans.

7. “Medical Savings Accounts” would no longer be limited to 750,000 taxpayers; the annual contribution limit on “Education Savings Accounts” would be doubled to $1,000; and new tax-deferred “Family Savings Accounts” would be provided for bottom-bracket taxpayers (few of who could afford to take advantage of them).

8. Long-term care insurance premiums would be made deductible.

9. Military personnel overseas would be exempt from tax on some or all of their earnings.

10. A 100% tax credit would be provided for gifts to public and private elementary and secondary schools, up to $200 a year. If all eligible taxpayers took advantage of this free opportunity to help their local schools, this provision could cost more than $17 billion a year (in 1999 dollars). Sen. McCain’s estimate of the size of his tax cuts does not appear to reflect the large potential cost of this school-aid program, which could be implemented more straightforwardly and with better targeting through direct grants to schools. (The distribution tables that follow do not include this credit, which appears to be intended as a backdoor way to funnel money to schools, rather than as a tax relief program.)

11. To offset much of the cost of his tax cuts, Sen. McCain proposes to curtail numerous corporate tax breaks, totaling $151.7 billion over five years. Sen. McCain provides an illustrative list, but does not specify the exact loopholes he would close.

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