With gas prices, food prices and home foreclosures all headed skyward, the current economic slowdown is tailor-made for a presidential election, hitting middle-class pocketbooks in ways not seen since Jimmy Carter lost to Ronald Reagan in 1980. The economy has displaced the Iraq war as the central focus of the election.
The economic situation of the government, however, may leave orthodox economic remedies outdated. Intense new budget pressures, from the enormous cost of the Iraq war to escalating health care spending for an aging population, will pitch the next president into choices not nearly as palatable as either candidate's campaign promises imply.
Tax fights promise to engulf the next administration almost immediately. In 2010, President Bush's $3.6 trillion tax cuts expire, meaning 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, however, taxes could rise to levels not seen in decades. If Obama imposes, as he has suggested, higher Social Security payroll taxes on top income earners, 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.
McCain goes in the opposite direction.
Seeking to bolster his standing with the Republican right, he moved quickly to embrace the Bush tax cuts that he had voted against, aligning squarely 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.
That ignores the government's voracious need for taxes to pay for government health care programs and the Iraq war. 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, because I just think the fiscal pressure is just too great, and I think it's delusional to think you can not only keep all of the Bush tax cuts but expand them," said Bruce Bartlett, a former supply-side advocate and official in the Reagan and George H.W. Bush administrations. "Anyway, he's not going to be able to do that because he's going to have a Democratic Congress to deal with."