washington -- The sharpening rhetoric between John McCain and Barack Obama over their competing plans to overhaul the nation’s tax system has underscored one of the most profound differences between them -- how they would target America’s wealthiest taxpayers.

Under McCain, the rich would see their tax burden ease. Under Obama, their rates would rise dramatically.

For much of the campaign, the two candidates have talked sparingly and obliquely about how they would deal with affluent taxpayers. But a recent volley of acid-edged campaign ads stirred up the tax issue, and a question posed last weekend by Orange County pastor Rick Warren zeroed in on how both men defined “rich.”

Obama said the dividing line was an income of $250,000 a year, while McCain responded somewhat flippantly that it was $5 million. McCain aides said later that the senator was joking, but his remark quickly became a campaign flashpoint.


“I guess if you’re making $3 million a year, you’re middle class,” Obama sniped, prompting a McCain aide to fire back: “It’s not the job of the government to define who is rich.”

Where to draw the line among the nation’s wealthiest taxpayers is the central difference between rival tax blueprints that offer starkly differing formulas for reviving a faltering economy.

On Tuesday, new ads from both camps played on the public’s rising anxiety about taxes, incomes and the volatile economy. “Three Times,” an Obama television ad airing from Virginia to Colorado, savages McCain for lavishing $200-billion tax “giveaways” on “big corporations.” McCain responded with “Millions,” a radio ad that predicts Obama will “raise taxes on your income, your electric bills, even your life savings.”

The two camps immediately issued rebuttals, each claiming its position on taxes was being distorted by the opposition. The Obama campaign contended that the overwhelming majority of Americans would not see a tax increase under his plan, only the wealthiest 5% or so. The McCain side retorted that the "$4 billion” in tax breaks for oil companies mentioned in Obama’s ad was misleading because McCain is proposing an across-the-board tax cut for all corporations and is not favoring the oil industry.


A close look at their proposals shows that the differences fall neatly along the traditional policy gulf that has long divided Republicans and Democrats: liberating the wealthy with tax cuts to stimulate the nation’s prosperity versus raising their rates to redistribute the tax burden and pay for crucial government programs.

“The real fault lines are over how to treat people in the highest tax brackets. It gets to the heart of their economic philosophies,” said Leonard E. Burman, a senior fellow with the Tax Policy Center, a nonpartisan Washington-based tax reform group that has questioned the details of both tax plans.

Both candidates have promised to balance their tax relief programs with budget cuts designed to trim soaring deficits. But the Tax Policy Center has warned that both plans -- coupled with the candidates’ high-cost healthcare proposals -- would balloon the $9.6-trillion national debt. The center’s analysis reported that McCain’s tax proposals would add $5 trillion to the debt over the next 10 years, while Obama’s would add $3.6 trillion.

“Both tax plans take for granted a big peace dividend from ending the war in Iraq,” Burman said. “That’s a big assumption.”


McCain’s plan would cater to wealthy taxpayers and corporations by extending and expanding President Bush’s tax cuts, slashing corporate taxes and weakening the estate tax, but it would also aid taxpayers across the board by making the full Bush cuts permanent.

A deficit hawk and formerly a critic of the massive tax cuts launched in 2001 by the Bush administration, McCain now embraces the tax policies of supply-side economists who contend that lifting the tax yoke on the rich would encourage investment and stimulate the economy. “Wealth creates wealth,” McCain said during a primary debate in Michigan last year.

Under his proposals, McCain would make all the 2001 and 2003 Bush tax cuts permanent. That would keep the two highest tax brackets at their current rates of 33% and 35% -- rather than reverting to 36% and 39.6%, where they were during the Clinton administration.

The tax cuts have “been law for eight years now, and taxpayers are used to those rates,” said J.D. Foster, a senior fellow at the conservative Heritage Foundation in Washington. “Allowing them to expire would be tantamount to a massive tax increase.”


McCain also has proposed a sharp reduction in corporate taxes. He would pare the two highest corporate tax brackets, 34% and 35%, down to 25%. The top bracket would be immediately eliminated, and the 34% bracket would be phased down to 25% between 2009 and 2014.

He would also maintain the 15% tax rates on dividends and capital gains for the highest-tier taxpayers. And starting in 2010, McCain would substantially reduce the estate tax. He would increase the exemption on inherited funds from $3.5 million to $5 million and sharply lower taxes on remaining wealth from 45% to 15% -- moves that would enable affluent families to hold on to more of their wealth.

Democratic-leaning economists say McCain’s plan offers little new aid to squeezed middle-class families. And they question whether corporations and wealthy Americans would convert McCain-era tax savings into new investments that would bolster the economy.

“McCain does nothing about income inequality,” said John Irons, research and policy director for the Economic Policy Institute, a center-left think tank backed by labor interests. “It’s skewed toward upper-income Americans to the exclusion of most everyone else.”


Obama’s tax plan skews the other way, aimed at strengthening benefits for lower-rung taxpayers and raising rates at the top. His plan would restore the Clinton-era rates for the two highest tax brackets to 36% and 39.6%.

In Springfield, Mo., last month, Obama pledged that if “you’re a family making less than $250,000 a year, you will not see your taxes go up.”

Obama would exempt seniors making less than $50,000 a year from paying any income tax. And he would make the Bush cuts permanent for poor and middle-class Americans, adding tax breaks such as a refundable credit for wage earners and a higher-education credit for students who agree to perform 100 hours of community service.

Under Obama’s plan, the highest corporate tax tier would hold at 35% -- a nod to Wall Street but higher than McCain’s slashed rate. Obama would raise the highest rate on dividends and capital gains from 15% to 20%. And he would keep the estate tax in the same form approved by Congress for 2009, with an exemption for the first $3.5 million and a top tax rate of 45%. That would mean a higher tax rate on the wealthy than McCain would allow.


As for the onerous alternative minimum tax, both candidates would allow more than 23 million middle-class taxpayers to avoid it by extending a 2007 “patch” that raises the amount of income triggering the AMT. In 2007, the AMT was triggered at $44,350 for single taxpayers and $66,250 for those filing jointly. McCain would increase that income trigger each year by 5%, starting in 2013; Obama would index it for inflation to maintain the patch.

Conservative economists caution that Obama’s tax hikes on the wealthy and corporations would increase the drag on the sluggish economy. “It would lead to disincentives for savings and productivity,” said Alan D. Viard, a former senior economist at the Federal Reserve Bank of Dallas who is now a resident scholar at the conservative American Enterprise Institute. “Over time, it would mean less capital accumulated and would ultimately force wages lower.”

Former Clinton administration Treasury Secretary Lawrence H. Summers waved off those concerns in a recent Obama campaign conference call, recalling that similar conservative alarms preceded a “seven-year stretch” of good times during the Clinton years. “The Obama tax plan is to be preferred on grounds of [tax] equity,” Summers said. “And because it’s more fiscally responsible, it is also likely to lead to better economic growth.”

But economists on both sides of the debate acknowledge that strong Democratic gains expected in Congress might lead to an Obama-like tax structure even if McCain wins the White House.


“A lot of this debate could turn out to be academic,” Viard said, “if a Democratic Congress won’t extend the Bush tax program.”

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steve.braun@latimes.com

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About this series

Voter anxiety over the weakening economy and other problems is a central feature of the 2008 presidential election. This series will examine how the candidates are responding to the discontent and how they would approach the country’s biggest challenges.

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How their tax plans compare

Individual income taxes

McCain: Would make permanent the Bush tax cuts and a top individual rate of 35%.

Obama: Would make Bush cuts permanent for the poor and middle class up to $250,000 a year.


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Corporate taxes, capital gains and dividends

McCain: Would phase out the two highest corporate tax rate brackets, 35% and 34%, leaving only the 15% and 25% brackets.

Obama: Would keep corporate rates. Would raise capital gains and dividend rates to 20% for two highest income tax brackets.


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Estate tax

McCain: Would raise the untaxed exemption from $3.5 million to $5 million in 2009 and reduce the estate tax rate on remaining wealth from 45% to 15%.

Obama: Would maintain the estate tax as mandated by Congress, with an untaxed exemption of $3.5 million and remaining wealth taxed at 45%.


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Sources: Tax Policy Center and Obama and McCain campaigns