October 16, 2008 12:35 PM | | Bookmark and Share

During a campaign stop earlier this week, presidential candidate Barack Obama answered a question about taxes put to him by Joe Wurzelbacher, an Ohio plumber who hopes to buy the business that he currently works for. Senator Obama has proposed to allow the Bush income tax cuts to expire for those married couples with adjusted gross income (AGI) above $250,000 and singles with AGI above $200,000. Mr. Wurzelbacher told Obama that, if he succeeds in obtaining the business, his income might exceed $250,000 and that Obama’s tax proposal could stand in his way of achieving the American Dream.

Senator Obama told Mr. Wurzelbacher, as well as those watching the final presidential debate when this question was brought up, that people like him need a tax break during those years when they are working towards the American Dream rather than during the years after they have already achieved it.

In other words, Obama proposes tax cuts for people like Mr. Wurzelbacher during the years when their income has not yet reached $250,000 rather than in the years after their income exceeds that level. Senator Obama’s tax plan would likely give the plumber who is earning perhaps $60,000 or less a year (and saving as much as he can) lower taxes compared to current law and compared to what he would have to pay under Senator McCain’s tax plan. We estimate that only 2.3 percent of taxpayers will be above the $250,000/$200,000 AGI threshold this year, meaning Obama would extend the Bush income tax cuts, and enact several new tax cuts, for all but the richest 2.3 percent. We are not convinced that new tax cuts for over 97 percent of taxpayers would help working America as much as other policy options, but at least Senator Obama makes a logical argument as to why any new tax cuts should be targeted to those who are not among the very rich.

In any event, even if Mr. Wurzelbacher earns $280,000, as he says he hopes to do, he’ll still get a substantial income tax cut under Obama’s tax program. That’s because Obama proposes to extend the Bush reductions in the bottom four tax brackets, which are the rates that apply to almost all of Mr. Wurzelbacher’s taxable income. To be sure, McCain wants to give Mr. Wurzelbacher an even bigger tax cut, but that would save him at most only $900 a year.’

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