So I was impressed to see presidential candidate John McCain quoted on the New America Foundation’s US Budget Blog as saying that when it comes to fixing Social Security’s long-term funding imbalance,”you’ve got to say, ‘Look, everything is on the table, let’s sit down at the table.’”

Given McCain’s recent tendency to vocally oppose tax increases of any kind, the natural follow-up to a comment like that is “you mean you’re open to increasing the payroll tax?” Since the McCain quote came from a much longer interview with the Pittsburgh Tribune-Review, I was interested to see whether, in fact, the Trib’s staff asked this follow-up question. And they did, sort of, by asking not whether McCain would support increasing the federal payroll tax rate, but by asking whether he would support a proposal that would increase the annual cap (currently $102,000) on the amount of wages that can be subject to the payroll tax in a given year. Here’s the exchange:

Trib: Do you favor raising the cap?
McCain: Pardon me?
Trib: Do you favor raising the cap?
McCain: No, and I think by doing so, as Sen. Obama wants to do, you are obviously putting a very, very big increased tax on … middle income Americans who filing jointly and in other ways will be paying a very big increase.

So the good news is that McCain isn’t taking a no-taxes pledge on this point. But the bad news is that he’s talking out of both sides of his mouth on this “cards on the table” approach. He tries to appear conciliatory by speaking the language of rational deliberation, then poisons the well by completely mischaracterizing the impact of a relatively tame tax hike on “middle-income Americans.”

In other words, when McCain says “let’s put all the cards on the table,” what he really means is “let’s have an honest discussion of all the ideas I agree with, and tell outright lies about the rest of them.” Is this better than a “no new taxes” pledge? I’m not sure it is. Pretending to be reasonable is arguably even worse than just admitting you’re irrational. The “no new taxes” gang is irrational at best, but at least they’re honest about it.

For more details on why McCain’s statement about raising the cap is wrong, go here.
You can read the whole Tribune-Review interview here.

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Trib: Do you favor raising the cap?
McCain: Pardon me?
Trib: Do you favor raising the cap?
McCain: No, and I think by doing so, as Sen. Obama wants to do, you are obviously putting a very, very big increased tax on … middle income Americans who filing jointly and in other ways will be paying a very big increase.

McCain’s response here is wrong in two important ways. First, as a CTJ analysis showed a couple of years back, only about 6.5% of Americans would be affected by a proposal that simply eliminates the cap on the federal payroll tax.

But more importantly, McCain’s characterization of Obama’s position on Social Security is flat-out wrong. What Obama has said is that he’d allow the payroll tax to apply to an individual’s wages above $250,000, which is a very different thing from simply removing the cap and taxing wages above $102,000. Here’s the Washington Post’s nice explanation of Obama’s position:

Under current law, income up to $102,000 a year is taxed for Social Security. Obama would create a “doughnut hole” by not imposing new Social Security taxes on income between $102,000 and $250,000. His aides said income exceeding $250,000 would be taxed at a rate of 2 percent to 4 percent, rather than the 6 percent tax that people pay toward Social Security on income below the $102,000 cutoff, which is matched by their employer’s paying a 6 percent tax.

And as a recent CTJ analysis points out, the Obama proposal would only affect 1 percent of Americans– none of whom could be described as “middle class.” As for the alleged “very, very big” tax increase on these middle-class Americans… well, suppose you have a “middle class” friend whose salary was $275,000 (remember, income from sources other than wages don’t count toward the payroll tax, so what matters is each individual’s salary). That means that under Obama’s plan, he would face a tax on his wages exceeding $250,000. His income exceeds $250K by $25,000, so his tax hike would be 2% of $25,000. That would be a $500 tax hike. If this sounds like somebody you know– and if you consider this person “middle class”– then McCain’s characterization seems apt. Otherwise, his description of the Obama plan is screamingly, almost libelously wrong.

The $500 tax hike described above certainly would count as a “very, very big” tax hike for an average middle-income family– but, unfortunately for McCain’s truthiness, there’s simply no way the Obama plan would ever apply to anyone who could reasonably be considered middle-class. Period.

To be perfectly clear about the way the Obama plan would work, a two-earner married couple would not pay more tax just because their combined income exceeded $250,000. Each spouse’s salary must exceed $250K to get hit by the Obama plan. And capital gains, dividends, etc., don’t count toward the $250K: what matters is your salary.

One could charitably attribute McCain’s false statement to fuzziness in his understanding of exactly how the Obama plan would work. One could also say charitably that perhaps “middle class” has a very different meaning in Arizona than in the rest of the nation. But a more realistic interpretation would be that candidate McCain is willfully misrepresenting the truth in the hope that scare tactics are still a good substitute for honest policy debates.

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First from FactCheck.org and Newsweek:

A TV spot claims Obama once voted for a tax increase “on people making just $42,000 a year.” That’s true for a single taxpayer, who would have seen a tax increase of $15 for the year – if the measure had been enacted. But the ad shows a woman with two children, and as a single mother, she would not have been affected unless she made more than $62,150. The increase that Obama once supported as part of a Democratic budget bill is not part of his current tax plan anyway…

The TV ad claims in a graphic that Obama would “raise taxes on middle class.” In fact, Obama’s plan promises cuts for middle-income taxpayers and would increase rates only for persons with family incomes above $250,000 or with individual incomes above $200,000.

And on separate Spanish and English-language radio ads:

A Spanish-language radio ad claims the measure Obama supported would have raised taxes on “families” making $42,000, which is simply false. Even a single mother with one child would have been able to make $58,650 without being affected. A family of four with income up to $90,000 would not have been affected…

The [English-language] radio ad claims Obama would increase taxes “on the sale of your home.” In fact, home-sale profits of up to $500,000 per couple would continue to be exempt from capital gains taxes. Very few sales would see an increase under Obama’s proposal to raise the capital gains rate.

Lots more analysis from FactCheck and Newsweek here (under “analysis”).

Really, this graph from the Urban/Brookings Tax Policy Center analysis is probably one of the best illustrations of the presidential candidates’ tax proposals because it illustrates the stark difference in priorities.

Sen. Obama’s tax relief is overwhelmingly focused on the lower and middle brackets while raising taxes on the wealthy (over $250,000). Sen McCain’s tax plan is sharply regressive, lowering taxes the most in percentage terms for the wealthy and the least for lower and middle-income brackets.

And how will the candidates’ respective proposals affect the federal budget deficit? The Washington Post ran an analysis under the misleading title “Obama’s Tax Plan Would Balloon Deficit, Analysis Finds.” While the article does discuss an interesting debate over whether it’s better to evaluate a spending proposal against a budget baseline (assuming current fiscal policy remains unchanged) or just compare proposals to one another in terms of their effect on the national debt, the headline will leave a misleading impression for casual readers who do not delve into the details of the article. This is because it’s actually the case that if all McCain’s tax proposals were implemented, they would balloon the national debt significantly more than Obama’s proposals.

As Media Matters for America notes:

The article stated in its third paragraph that “[a]ccording to a recent analysis by the nonpartisan Tax Policy Center, Obama’s tax plan would add $3.4 trillion to the national debt, including interest, by 2018.” The 10th paragraph stated that “[a]ccording to the Tax Policy Center, McCain’s tax plans would increase the national debt by at least $5 trillion over the next 10 years.”

So not until the 10th paragraph of the article did the Post see fit to tell its readers that McCain’s plan is actually worse for the national debt. There’s some “fair and balanced” journalism.

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Washington has kicked off a perfectly predictable donnybrook over stimulus. Democrats, who spent the past eight years bashing George Bush for turning a Clinton-era surplus into a big deficit, are now defending what will be nearly  $1 trillion in new tax cuts and spending. Republicans, who presided over decades of deficits, suddenly are worried about the debt we are leaving to our grandchildren.

Yet, this entire squabble may be missing the point. If Washington is going to help dig the economy out of its very deep hole, it must do more than just stimulate demand. It must also restore the health of the credit markets.

That is not to say that designing a good stimulus bill is not important. It is. But we need to recognize the limits of what all this government spending and tax cutting can do.

For now, Washington is falling back on recipes that have been tried many times before with only limited success. On the tax side, proposals such as allowing businesses to write-off capital costs more quickly, or giving cash payments to workers, have been tried repeatedly in past recessions. As a new TPC report card shows, there are no magic bullets here. While some pieces of the tax stimulus working its way through Congress will be better than others at jump-starting the economy, none will have a major impact.

The same goes for spending. A new CBO report concludes it will take years for the proposed new outlays to work through the economy. For instance, CBO figures only about one-third of $30 billion in proposed highway money could be spent within the next 20 months.

My sense is that, at best, the stimulus package will keep things from getting worse. Necessary, as they say, but not sufficient for recovery. The IMF recently published an interesting paper that noted the importance of both stimulus and credit market reform, even as it called for massive efforts to boost demand. Christy Romer, a key adviser to President Obama and a highly respected economic historian, has argued that New Deal fiscal policy did almost nothing to end the Great Depression.   

Think of stimulus as a life preserver. It may keep the economy from drowning, but won’t do much to get us back on a course of sustained economic growth.

It will be up to the Fed and the much-maligned TARP (and its costly progeny) to accomplish that. The problem, of course, is that when it comes to fixing the credit markets, we are sailing in unchartered waters. Do we create a “bad bank” that will offload toxic loans from troubled financial institutions?  Do we nationalize some brand-name banks? In desperation, we find ourselves looking to the experiences of Sweden or Japan for answers that are not obvious.

After a lot of arguing, we’ll enact a nearly $1 trillion stimulus. It will help, though much of the money will inevitably be wasted. But keep your eyes on what the Fed and the Obama Administration do to get the credit markets working again. That, more than tax cuts and spending, will be key to how quickly the economy gets back on track. 

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I’d give the overall plan a Gentleman’s C. Some provisions would channel money to low-income people most likely to spend it, but deliver the cash too slowly. Others distribute the funds relatively quickly, but give an awful lot to wealthier taxpayers who are least likely to spend it.

The business tax cuts may be even less effective. The proposed investment incentives are troublesome on two counts: They are not likely to help companies that are losing money (if you are already not paying taxes, an additional tax break is of no value). At the same time, they would create a windfall for profitable companies that were going to invest anyway.

TPC will release a detailed report card on the Ways & Means bill within the next few days but, in the meantime, here’s a quick look at the pros and cons of the tax stimulus, starting with the breaks for individuals:

Proposals to increase the Earned Income Tax Credit and the child credit get high stimulus marks for targeting those working families most likely to spend the money, one key to getting the economy back on its feet. Unfortunately, many families won’t get their credits until they file their 2009 tax returns in 15 months.

The cash payments to workers through the Make Work Credit, one of President Obama’s big campaign promises, almost mirror the pros and cons of the EITC. By increasing take-home pay by about $10-a-week, it will get cash into people’s wallets quickly enough. However, couples making up to $200,000 would get this payment, and many are likely to save, not spend, those extra dollars. One good idea: Paying out the money a bit at a time rather then in a lump-sum rebate. Some economists think people are more likely to spend money when they get it in small chunks. 

It is tougher to see how most  of the business credits would help much. The bill would allow small businesses to immediately deduct the cost of up to $250,000 in capital investment they make this year. It would also allow larger businesess to take faster write-offs for investments they make in 2009. But in the real world, how many are in any position to buy new equipment now?  Their sales are in the tank and they can’t get credit.

Another proposed change would get cash to businesses that were once in the black, but are losing money now. Making better use of Net Operating Losses would not only provide a much-needed boost to their cash flow, it might also leverage the investment incentives. This may be the best of the business tax breaks when it comes to helping the economy in the short-run.

While some of these ideas may help a bit in today’s lousy economy, what will happen once we get back on our feet? Obama wants to make the Making Work Pay credit permanent, and it is unlikely the increases in the EITC or child credit will ever be rolled back. It is the same for small business expensing of equipment. So we probably are making some important long-run changes to the tax code in the name of stimulus. I’m just not sure they are going to do very much good right now.

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But in one sense, even though the real Joe doesn’t own a business, most small business owners, like Joe, also have very modest incomes. Based on a sample of individual income tax returns, TPC finds that among tax units that receive most of their income from their own business, a partnership or a farm (reported on schedules C, E, or F), more than half have income below $30,000 and 80 percent make less than $100,000. (Table T07-0206)

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