Obama's muddle about the middle

SUMMARY: The Obama campaign is exaggerating with its claim that McCain's tax plan offers nothing for the middle class.

With energy prices continuing to weigh on Americans' wallets and psyches, Sen. Barack Obama's campaign is stepping up efforts to portray Sen. John McCain as a politician more willing to help big oil companies than consumers.

Responding to a McCain television ad seeking to direct anger over rising gas prices at his opponent, the Obama campaign issued a point-by-point analysis that noted, among other things, that the five largest U.S. energy companies would profit handsomely under McCain's economic plan, which would reduce corporate tax rates and allow expensing for some investments.

"Sen. McCain's economic plan gives nearly $4-billion in tax breaks to the oil companies but doesn't provide any tax relief to more than 100-million middle-class families," Obama spokesman Tommy Vietor said July 18, 2008.

Though that makes a handy sound bite, Obama's campaign is conveniently picking from among the corporations that would benefit from McCain's plan, while ignoring some of his tax proposals directed at individuals.

Obama's campaign derives the "nearly $4-billion" figure from an analysis of McCain's plan by the Center for American Progress, a Washington think tank headed by John D. Podesta, former President Bill Clinton's chief of staff. We examined that one previously and found that while the nearly $4-billion claim was right, Obama's overall point was Barely True.

In fact, McCain's plan would lower the tax rate on all corporations, not just big oil companies. By focusing on how the proposed tax cut would help a handful of energy giants, Obama's camp makes the plan look like a special-interest package exclusively tailored to the largest energy producers.

Obama's campaign also distorts the McCain plan's effect on individuals. Though independent analyses of the income tax provisions have generally concluded McCain's plan would most benefit wealthy Americans, it has provisions that would help individuals with lower household incomes.

Chief among these is a proposed increase to the exemption taxpayers may claim for each dependent — currently $3,500 — by $500 each year beginning in 2010 until it would reach $7,000 in 2016, after which it would be indexed for inflation. Under the McCain plan, married couples that file a joint return reporting adjusted gross income of $50,000 or less would be eligible for the $7,000 exemption immediately. So clearly, middle- and lower-income households with children would receive above-average tax cuts.

McCain also would raise and index for inflation the threshold for the alternative minimum tax, or AMT, a separate income tax that was intended to ensure that people did not use loopholes to avoid paying taxes but that has been ensnaring more and more middle-income Americans. Congress in recent years has extended the AMT exemption for a year or two at a time so that so large numbers of taxpayers don't become subject to the tax.

Congress is almost certain to enact another temporary "patch" covering the 2008 tax year. But McCain would permanently extend the AMT exemption, index it for inflation and allow individuals to claim personal nonrefundable credits against the AMT. How much this would help middle-class families largely depends on how you define middle class. The Tax Policy Center says it would primarily benefit more affluent households in the 80th to 95th percentile of income — those earning between $111,645 and $226,918 in 2008 dollars, were McCain's plan to be fully phased in next year. Still, households with more modest means would not be subjected to the AMT under McCain's proposal.

McCain would also extend President Bush's 2001 and 2003 tax cuts, currently set to expire at the end of 2010. Those cuts collectively reduced top marginal tax rates on individuals' incomes, cut the rates on capital gains and dividends, expanded the child tax credit and reduced taxes on married couples compared to singles.

The Tax Policy Center says McCain's policy proposals collectively would reduce the tax exposure of 60 percent of all American households, though fewer than half of those making between $18,981 and $37,595. The analysis backs up Obama's broad contention that McCain's tax policy is weighted to give the largest benefit to higher-income taxpayers. However, it's wrong to say McCain's plan would provide no relief to middle-class Americans. Its more generous exemption for dependents and lower tax rates would cut across income levels and reduce or eliminate many taxpayers' AMT exposure. For this reason, we rule the Obama campaign's statement Barely True.