The Short Story
As we created this spreadsheet/web site we carefully examined the numbers and a fairly clear story has emerged from the data. This presents a short take-home message of the results of the analyses shown in the figure.
Tax Plans - The Short Story.
The tax plans affect three income brackets differently. The Majority 83% earning less than $100,000 move to a nearly flat tax of 11% under McCain and to a progressive tax of 4 to 12% under Obama. The Rich 16% up to $500,000 get the same under both, a progressive increase from 12% to 27%. The Very/Super Rich 1% are different. Obama raises taxes 5% to 33% seeking to have a flat tax and pay for the progressive tax cuts of the Majority. McCain preserves the Super Rich Benefit, allowing taxes to continue to drop from 27% to 23% at ten million and to 18% at one hundred million.
What is "The Right Direction to Move To"
To understand what the candidates' plans mean for the future of the country, it is best to look beyond which candidates' plan gives you more/less right now. Rather, look at how the tax plans affect people at each income level and whether the changes move the nation in the right direction to where we should be. This means understanding how much people at different income levels pay now and what direction each of those groups should move to have an effective tax plan that collects taxes and distributes the burden with some consideration of both obligation to pay and ability to pay. Decide which incomes should experience a flat tax, a progressive tax, or a negative tax. Later we can worry about tax cuts across the board.
Three Income Brackets
A clear picture emerges if you divide the income distribution into three categories each controlling 33% of the nation's income and representing 83%, 16% and 1% of the population. The Majority (the 83% earning less than $100,000/year including the middle class and the lower income categories), The Rich (people from the top 17% to the top 1% earning up to $500,000), and The Very Rich (earning over one million per year; top 1%) and Super Rich (earning over $100 million per year; top 0.01%).
Tax Plan for the Majority 83% income $0 to $100,000 annual income
The proposed tax cuts produce different results for the Majority. The McCain produces an effective flat (10%-12%) tax for this group. The Obama plan produces a progressive tax starting at 4% and increasing to 12%. Progressive tax plans recognize that people with very low income have greater difficulty covering expenses and provide a lower rate to facilitate their movement up. (See figure left side).
Tax Plan for the Rich 16% income $100,000 to $500,000
Both candidates' tax plans are nearly identical in this range between $125,000 and $1,000,000 per year. It increases from 13% to 26%. (See Figures middle area).
Tax Plan for the Very Rich (Top 1% over $500,000) to Super Rich (Top 0.01% over $100,000,000)
The candidates take sharply differing approaches to the top one percent. This is an important tax category because this one percent of the population controls 33% of all the taxable income in the US. So changes in this bracket dramatically impact total revenue although it represents few households. This is the group that derived the greatest benefit from the Bush tax cuts (see Actual Tax Rates). The current tax policy provides an effective Super Rich Tax Break, in which people making $100 million per year pay 18% while the middle class pays 12% and mere millionars pay 27%. The McCain plan leaves these tax cuts in place locking in the benefit. The Obama plan increases the tax rate about 5.4% on this group, seeking to increase the effective tax rate to 33% and reducing the Super Rich Tax Break. Obama is moving the tax policy toward a flat tax rate beyond $1 million per year at an effective rate of 33%. (see Figures right side)
Notes
We use the 2006 reported tax data using the number on effective tax rate (taxes paid divided by total taxable income based on IRS document 06in11si.xls (see links). This is different from the marginal rate that is the rate taxpayers pay on each additional dollar. The marginal rate does not include the effects of tax breaks such as capital gains.