The economy: McCain vs. Obama

Taxes. Social Security. Housing. Gas prices. Get ready for lively debate between Democrat Barack Obama and Republican John McCain.

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By Jeanne Sahadi, senior writer

NEW YORK ( -- Barack Obama's emergence as the presumptive Democratic nominee on Tuesday sets the stage for a sharp partisan debate over the issue weighing most heavily on voters: the economy.

Over the past several months, as concern grew about the nation's struggling economy, few major differences surfaced between the proposals of Obama and Democratic rival Hillary Clinton.

But that's not the case between Obama and John McCain, the presumptive Republican nominee. The two senators part company on taxes, health care, entitlement benefits and other key economic issues that the next resident of 1600 Pennsylvania Ave. will need to tackle.

At the root of their differences: their views on tax policy and the roles of government and the markets in achieving economic and social goals.

Changing taxes

In the name of economic growth, McCain says he would keep the tax cuts of 2001 and 2003 in place and reduce the corporate tax rate.

He has also said that he'd eliminate the Alternative Minimum Tax and would introduce an alternative two-rate income tax code that would be simpler than the regular one. Taxpayers, he said, could choose which code to use.

Tax expert and Yale professor Michael Graetz doubts it will be simpler for taxpayers to have to figure out their tax liability twice to see which code they prefer to file under. "But if the option is sufficiently appealing, you can phase out the old system," he said.

Obama has pledged to keep the tax cuts in place for everyone except those making roughly $250,000 and up. He also has pledged to cut taxes further for the middle class.

"The tax code has been written on behalf of the well-connected," he said in April during a debate in Philadelphia. "Our trade laws have - the same thing has happened. And part of how we're going to be able to deliver on middle-class tax relief is to change how business is done in Washington."

"He seems more focused on redistribution of the tax burden," Graetz said.

Obama has also indicated he would raise the capital gains tax to somewhere between 20% and 28%. Graetz doesn't think he'd raise it much above 20%. "The truth is you can't go above 25% without losing a lot of money. People won't sell," he said.

Fixing Social Security

When it comes to shoring up Social Security's long-term shortfall, McCain has said he'd prefer to cut benefits than raise taxes, but he recognizes there will need to be bipartisan consensus.

McCain has expressed support for individual investment accounts as a way to augment Social Security benefits. But his campaign has indicated he no longer favors diverting payroll taxes from Social Security to fund those accounts.

Obama has said he opposes individual accounts and doesn't favor increasing the retirement age or cutting benefits. But he has called for increasing the amount of payroll tax that very high-income workers pay by subjecting more of their income to the payroll tax.

What he hasn't clarified yet is whether or not their Social Security benefits would also go up as a result of paying more into the system.

Curing health care

When it comes to reforming health care, McCain would rely more on individual efforts and market forces to drive down costs. Obama would rely more on government and establish health insurance mandates for companies and individuals to make coverage more affordable.

McCain's plan would not require anyone to have insurance, but he would change the tax incentives for getting it.

Currently, most people get their insurance through their employer. Companies pay 70% to 85% of the premiums, and workers don't have to pay income tax on that subsidy. Under McCain's plan, workers would pay income tax on that subsidy but would also receive a tax credit (a dollar-for-dollar reduction of their tax bills) worth $5,000 for family coverage and $2,500 for single coverage.

The rationale: Under the current system, people have no incentive to be cost-conscious about their health care, and a limited tax break will give all parties - workers, insurers and doctors - a reason to keep costs down. Converting the tax-free income subsidy to a tax credit also allows those who buy insurance on their own to get a tax break. Currently, they get none.

McCain would also let individuals buy insurance plans across state lines to further boost competition in pricing.

For the uninsured, he would create a state-level Guaranteed Access Plan that could receive federal funds and provide subsidies to low-income Americans.

Obama would make coverage mandatory for children, and he would create a National Health Insurance Exchange of public and private plans for the uninsured, for those who aren't eligible for other public programs and for small businesses. All plans would have to meet standards in terms of benefits, quality and efficiency.

Obama would keep the tax-free subsidy for those covered at work. But he would also create a federal subsidy - based on income - for people who don't qualify for government plans such as Medicaid.

Obama would require all employers to offer a plan or contribute money to employee's health costs. Companies that do neither would be required to contribute a percentage of payroll to the health exchange.

(Here's a more in-depth look at how their health care plans differ and what critics of both candidates' proposals say.)

Helping homeowners

It's not clear what role the next president will have in shaping the government's response to the foreclosure crisis, because it's unclear what the housing situation will be and what Congress will have accomplished by Jan. 20, 2009.

Each candidate, however, has expressed views on what lawmakers and lenders should do.

Although initially opposed to additional government aid in the mortgage mess, McCain has joined Obama in supporting the idea of the Federal Housing Administration backing loans that lenders have written down to affordable levels for borrowers.

But the plans they support differ somewhat.

Obama backs a proposal from House Financial Services Chairman Barney Frank, D-Mass., and Senate Banking Chairman Christopher Dodd, D-Conn., that would require borrowers to share equity with the FHA when they sell or refinance their home. (Here's how the plan would work.)

McCain has proposed the "HOME Plan," which blends elements of the Frank/Dodd plan with proposals from the Bush administration and the Office of Thrift Supervision. Under McCain's proposal, if a borrower sells his with a gain, the lender and the federal government each would receive a portion of the equity.

Beyond more help from the FHA, Obama has called for a $10 billion foreclosure prevention fund to help victims of mortgage fraud sell their homes or modify their loans so they can avoid foreclosure and bankruptcy.

McCain has called for the creation of a Department of Justice task force to investigate mortgage crimes involving lending and securitizing home loans.

Getting a grip on energy

As gas prices climbed toward $4 a gallon this spring, McCain supported a summertime gas tax holiday, which he proposed paying for by using money from the Highway Trust fund.

Obama opposed such a tax break, contending it would not amount to significant savings for drivers nor help lower gas prices.

To combat the rising price of oil, McCain has also called on the government to temporarily suspend buying oil for the country's Strategic Petroleum Reserve.

Both candidates are calling for less reliance on oil as a fuel staple and reductions in greenhouse gas emissions. Obama and McCain support some form of a cap-and-trade system, whereby companies would pay for the right to emit carbon dioxide in a market-based auction.

Obama has also proposed investing $150 billion over 10 years to promote alternative energy and conservation.

(Here's a closer look at McCain's and Obama's energy proposals.)

Keeping spending in check

When it comes to addressing the federal budget deficit, McCain's preferred solution is cutting government spending. He has called for a one-year freeze on discretionary spending to assess which programs should stay and which should go. He has also said he would demand that Congress eliminate earmarks.

Obama too has said he wants to restore fiscal discipline by cutting earmarks to levels no greater than they were in 2001 and reinstating so-called pay-go rules. Under pay-go, lawmakers may not pass any spending measures or tax cuts with paying for them by making cuts to other programs or raise an equal amount of money.

Despite the candidates' promises, experts are skeptical that either candidates' economic proposals when taken as a whole could be fiscally sound. To top of page

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