Monday, October 20, 2008

The Truth About Obama's and McCain's Economic Plans

Rich Noyes over at NewsBusters has done a great job summarizing the McCain and Obama plans. This chart says it all. At the end of 10 years with McCain's plan we see an annual growth of GDP to just over $500 billion in contrast to Obama's plan which only achieves an annual growth rate of under $200 billion.

Why is this important? If you review my analysis below: GDP Analysis and Socialism.

You will see that our GDP per citizen in the United States is roughly $45,000 as compared to China with a GDP per citizen roughly $2500. Our total GDP is currently $13.8 trillion a year compared to China at $3.2 trillion a year. The entire world GDP is somewhere south of $60 trillion a year. It wouldn't take that much effort for China to increase their GDP to $6 or $7 trillion a year or more. As they move to a more capitalist marketplace their GDP will start to rise. Within 10 years it will be strategically important for the United States to have a strong annual GDP growth rate.

From Dr. Merrill Matthews, resident scholar with the Institute for Policy Innovation

There are at least three necessary ingredients for jumpstarting a faltering economy. John McCain embraces all three; Barack Obama shuns them. It's just that simple.

Free Trade -- Economist Milton Friedman once said that of all the pro-growth policies a government should adopt, free trade is the most important. Former Federal Reserve Bank Chairman Alan Greenspan has said that taxing trade between countries makes no more economic sense than taxing trade between states.

McCain aggressively pushes free trade agreements. Obama, especially since pandering to the union vote in the Ohio and Pennsylvania primaries, talks like a protectionist and even opposes the Colombia Free Trade Agreement.

Low, simplified taxes -- McCain maintains the current tax rates on income, capital gains and dividends and cuts the corporate tax rate. Obama proposes numerous "tax cuts," many of which are nothing more than income transfers to people who don’t pay taxes. He would complicate the tax code and, because he's targeting the cuts, he gets to pick the economic winners and losers.

Reduced government spending and regulations -- According to the National Taxpayers Union Foundation, during the first session of the 110th Congress:

  • McCain sponsored or cosponsored 22 bills, which would have increased federal spending by $8 billion annually.
  • Obama sponsored or cosponsored 114 bills, increasing federal spending $75 billion annually.

That's a little more than $9 of government spending for Obama for every $1 for McCain.

Here are the key data points summarized by Rich. Please click the title above to visit his blog and read more.


MCCAIN PLAN: GDP will be, on average, $283.7 billion higher over the 2009 to 2018 horizon. Real (inflation-adjusted) GDP growth is between 0.2 and 0.5 percent higher than the baseline. The expansion in the U.S. economy is largely due to the incentives to save and invest in productive capital and technology through reductions in capital gains and dividend taxes, and accelerated expensing of depreciation for capital purchases. These incentives are enhanced by a substantial reduction in the tax rate on corporate income, which lowers consumer costs and allows corporations to expand their investments.

GDP grows due to increased consumption. The level of output in the economy as measured by the GDP jumps by an average of $101.7 billion (after inflation) in Obama's plan. By 2018, the difference between baseline and the forecast is $187.2 billion in additional output, or about a 1.2 percent increase in the level of GDP. Nearly all of this increase stems from personal consumption expenditures. The consumption of households grows by an average of $146.9 billion, and government consumption expands by $6.6 billion. Indeed, household consumption outlays jump by $235.2 billion above baseline in 2018, and over the entire 10-year period average $146.9 billion above what they would have been without Senator Obama's plan. Net exports, however, fall by an average of $59 billion, indicating that imports (which subtract from GDP) grow more rapidly than exports did in his plan. Gross private domestic investment increases by an average of $4.2 billion.


MCCAIN PLAN: Total employment increases an average of 2.13 million jobs over the next 10 years. Peak job increases over the baseline are 3.4 million additional jobs in 2018. The difference between the number of jobs Under the McCain plan and the baseline increases each year. The corporate income tax reductions and the incentives for saving and investment allow business owners to expand their operations and increase their investment in new equipment. Investment leads to expanded output that, in turn, increases personal incomes and employment.

OBAMA PLAN: Employment grows modestly. The Obama plan encourages job growth principally through boosting consumption. Average job increases equal 915,800 over the 10-year period. Private-sector employment averages 814,700 additional jobs. The difference between the two results equals public-sector employment growth above the baseline, or an average of 101,100 new government jobs per year. These numbers would have been bigger had the Senator not raised tax rates on upper-income taxpayers.


MCCAIN PLAN: The McCain tax plan is projected to increase a person's disposable income as much as $2,438 above the baseline. A family of four is projected to have $9,750 more disposable income than the current baseline and an average of $5,138 more after-tax income than the baseline over the next 10 years.

OBAMA PLAN: Senator Obama's plan extends the Bush tax reductions for taxpayers with adjusted gross incomes below $250,000 a year, and this "hold harmless" provision in his plan causes higher after-tax incomes. For a family of four, disposable income (after inflation) rises by an average of $3,631 over the forecast horizon. By 2018, after-tax income has increased by $5,620.


MCCAIN PLAN: McCain's tax plan provides support for greater levels of personal savings, a particularly important development given the tsunami of entitlement spending expected over the next five decades. The personal savings rate is 2.5 times higher than the baseline. In 2018, for instance, the baseline requires a personal savings rate of 2 percent of income. The McCain plan raises the rate to 4.9 percent of personal income. That increase in the rate translates to substantial increases in total savings. The baseline forecast requires an annual average level of personal savings of $3.1 billion (after inflation). The McCain plan raises that annual average to $212 billion, or a 68-fold increase over baseline levels.

OBAMA PLAN: The modest boosts to income stemming from the extension of the Bush tax reductions in Obama's plan lead to increased savings. Personal savings increase by an average $135 billion (after inflation) between 2009 and 2018.

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