The Budget According to McCain: Part II

Summary
In our last installment we looked at McCain's pronouncements on spending cuts to help balance the budget. In Part II, we examine what he's said on a subject that might be more pleasing to many Americans: lowering taxes. We found exaggerations and distortions here, as well.

McCain says that eliminating the Alternative Minimum Tax will save "more than 25 million middle-class families more than $2,000 every year." But McCain's "middle class" includes families making up to $200,000 per year, and the $2,000 figure is an average. Those earning more money will see the lion's share of the savings. McCain also leaves out the fact that the proposal could cost as much as $1.6 trillion over 10 years.

By the measure most economists prefer, McCain is wrong in his claim that Sens. Clinton and Obama want to implement "the single largest tax increase since the Second World War;" it would be the fifth largest. At a more basic level, it's misleading to tag Clinton and Obama for something that was scheduled during the Bush administration – the expiration of the 2001 and 2003 Bush tax cuts, which by law will occur at the end of 2010.

McCain also repeats the mantra that cutting the capital gains tax rate will increase government receipts. In fact, rate cuts produce a spike in revenue, but it's only temporary. McCain also falsely claims that higher capital gains tax rates will affect 401(k) plans.
McCain was the first to announce the now widely discredited proposal to suspend federal gas taxes. The proposal wouldn't lower prices at the pump and would result in (effectively) an $8.5 billion windfall to oil companies.

Analysis
In an April 15 speech, McCain unveiled a set of proposals that he says would reduce spending, lower taxes and still leave the government with enough money to balance the budget. We've already tackled McCain's pledge to cut discretionary spending by $100 billion. In this second part, we examine his plan to lower your taxes.

Alternative Middle-Class Cuts
McCain says his plan to eliminate the Alternative Minimum Tax (AMT) would be a "middle-class tax cut." That depends on what your definition of "middle class" is.

McCain (April 15): "I will also send to the Congress a middle-class tax cut – a complete phase-out of the Alternative Minimum Tax to save more than 25 million middle-class families more than 2,000 dollars every year."

Douglas Holtz-Eakin, McCain's economic adviser, confirms that the senator is referring to taxpayers making up to $200,000 a year. According to projections by the Tax Policy Center (TPC), 26.6 million of those paying the tax in 2010 will make up to $200k, while 5.8 million will make more than that. TPC figures also show that the majority (64 percent, or 20.9 million) of AMT taxpayers in 2010 will earn more than $100,000 a year. The AMT was originally devised in 1969 after 155 taxpayers with incomes over $200,000 escaped paying any federal income taxes. But because the tax isn't indexed to inflation, it has been affecting a greater percentage of taxpayers in most income classifications each year; that $200,000 threshold would be worth $1.2 million in today's dollars. Bush's tax cuts have caused the AMT to affect more people than it otherwise would: Taxpayers are subject to the AMT when the amount they owe under the "regular" tax system dips below the amount they would pay under the AMT, so cuts in the regular tax rate can actually increase the number of people who must pay the AMT. In fact, the estimated percentage of taxpayers subject to the AMT will have more than doubled in 2010 because of the Bush tax cuts.

Holtz-Eakin also told FactCheck.org that the families to which McCain refers would save an average of $2,000 a year. That means some would save more and some would save less. Those in higher income groups pay much more of AMT taxes than do those with lower earnings, and they would reap more of the benefits of repealing the tax as well. About 90 percent of the tax benefits of doing away with the AMT in 2007, for instance, would have gone to households in the $100k and above group; 55 percent would have gone to households earning more than $200k. We've charted the Tax Policy Center's data on who will pay the AMT in 2010 and how much of the AMT tax burden they'll bear: