The Candidates’ Tax Proposals, Part II: Distribution

We’ve all heard Obama and Biden claiming that their tax plan would cut taxes for 95% of American families, while McCain would cut taxes only for the rich. I’ve been looking over the Tax Policy Center’s analyses, and I don’t see that. Quite to the contrary, they find that McCain would cut taxes for more families than McCain, while Obama’s plan would raise taxes for 14% of families, including nearly 8% of the poorest income bracket analyzed.

We tend to think of a tax cut’s effect as being uniform across each income bracket, but that’s not the case because our tax code is extremely complex, and both campaigns’ proposals (especially Obama’s) include not just bracket changes, but also a laundry list of new credits and deductions. If you don’t qualify for Obama’s proposed credits and deductions, you won’t get a tax cut from him.

TPC has kindly published data on what percentage of each income quintile would see their taxes go up or down under McCain’s and Obama’s proposals. Here is the breakout for Obama’s tax plan:

And for McCain’s:

McCain’s plan doesn’t cut taxes for everyone in the lower quintiles, but many people in those quintiles don’t pay federal income taxes at all under current law, which makes it hard to cut their taxes. Obama manages somehow — under his proposal, the average federal tax burden for the bottom quintile (including payroll taxes) is negative. In my book, that’s a handout, not a tax cut.

But what about the average effect on each quintile? Doesn’t Obama cut taxes more for the middle class? Not according to the Tax Policy Center. The average tax cut for bottom quintile households is higher for Obama’s proposals, and about the same for the second quintile, but the third and fourth quintiles would get much larger cuts from McCain.

We’ve all seen the Washington Post distribution table based on Tax Policy Center numbers (although I believe they’re using a different TPC study – I’m using 2012 projections based on the stump speech proposals, but their McCain numbers look like the much more modest estimates they based on earlier statements by McCain’s economic advisors). Many of us have also seen the rescaled version. Both charts omit two key pieces of information — how much tax does each household actually pay, and how big a slice is that of their income. Here are my graphs with those pieces of informationa added, for Obama’s proposals:

And McCain’s:

McCain’s cuts look to me like an effective across-the-board cut, with each bracket seeing their average tax burden decline by about the same percent. Obama is raising taxes on the top quintile (who already pay a much larger share of their incomes in taxes) in order to provide a single-pixel tax cut to each of the other quintiles.

The tax burden pie charts show the same story. Here is what percentage of the total tax burden falls on each quintile under current law:

Under Obama’s proposals:

 And under McCain’s:

For comparison, this is the distribution of pre-tax income:

McCain’s pie chart is almost identical to the current law pie chart, as you’d expect from a proportional across-the-board tax cut. Obama’s pie chart shows the top quintile (who have slightly more than half of the nation’s pre-tax income) seeing their share of taxes go from 65% to 70%.