The Heritage Foundation has sent a letter asking Barack Obama’s campaign to pull an ad that falsely describes Heritage analysis of Barack Obama’s tax plan. The ad claims Heritage analysis shows “the middle class would likely pay less under Mr. Obama’s plan.” In the letter, Heritage lawyer Alan P. Dye tells the Obama campaign that the source of the quote was not in fact any Heritage analysis, but rather a New York Sun article that erroneously summarized the views of Heritage analyst Rea Hederman.
That the reporter’s summary is erroneous is evident from the actual quotes from Mr. Hederman presented in the article, which make it quite clear that Mr. Hederman believes your tax plan would be bad not only for the country, but for the middle class.
For a full analysis of the candidates tax plans, see “The Obama and McCain Tax Plans: How Do They Compare?” written by the staff of Heritage’s Center for Data Analysis, including Rea Hederman. Here is the relevant analysis:
… many aspects of Senator Obama’s tax plan generate little economic activity and could actually reduce economic incentives. Senator Obama raises the marginal tax rate on many low- and middle-income taxpayers. Senior citizens also bear a significantly higher tax burden when they declare more than $50,000 in annual income, so seniors are strongly encouraged to work less. Other tax credits, such as one for homeowners who do not itemize, only benefit existing homeowners and spark little additional economic activity.
Tax credits can boost short-term consumption and employment, but tax credits do not change basic incentives to work, save, or invest. Workers and investors are given no reason to work or invest more in response to the tax credits. Furthermore, tax credits complicate the tax code, making it less efficient.
Since over one-third of Senator Obama’s tax plan consists of demand-side stimulus through tax credits, economic growth is not as strong as it would be under a similar size tax cut that changed work or savings incentives.
Senator Obama’s plan increases economic growth compared to the baseline because his plan reduces the tax on capital below baseline forecasts and cuts the marginal tax rates for many workers. However, economic growth is also constrained by higher taxes for many individuals and small businesses. Tax credits do not produce the same economic growth as rate cuts or tax simplification.
Senator McCain’s plan is substantially better at spurring economic growth than Senator Obama’s. This is not surprising, since Senator McCain focuses on economic growth and job creation while Senator Obama focuses on the redistribution of income.