In June the Center for American Progress Action Fund analyzed the impact of the tax plans proposed by Sens. John McCain (R-AZ) and Barack Obama (D-IL) on John and Cindy McCain’s own personal income taxes and Barack and Michelle Obama’s own personal income taxes. The availability of the candidate’s tax returns at that time offered a unique opportunity to look at the impact of their proposed tax law changes on real, live, wealthy people. Three events of note since then cause us to update that analysis:
- The McCain campaign released Cindy McCain’s partial 2007 tax return late last week; previously only her partial 2006 return had been released.
- Sen. McCain proposed additional tax cuts as part of his Pension and Family Security Plan released October 14. The new cuts are temporary and would be in effect through 2010. They include cutting the top tax rate on capital gains to 7.5 percent from 15 percent, increasing the limit on capital losses, waiving the income tax on unemployment benefits, and new tax relief for retirees.
- Some months ago the Obama campaign clarified its own tax proposal, which results in slightly larger tax cuts for both the McCains and the Obamas than shown in our June analysis.
A fourth tax development that is not included in the new analysis below is the increasing attention being paid to the tax impact of the McCain health care plan. There are two reasons for excluding this from our consideration. First, we don’t have enough information on the health insurance of the McCains and Obamas to do the analysis. Second, for well-off couples like these the tax impact of the health care plan will be small relative to the impact of their tax plans.
So what does our new analysis show? With respect to Cindy McCain’s 2007 tax return, it shows over $1.8 million dollars less in reported income than her 2006 return. The McCains file separate returns and Sen. McCain’s previously released return shows an increase from 2006 to 2007 of $46,995. But with his wife’s loss of $1,869,403, the family income substantially declined—falling to $4,602,437 from $6,066,431 in 2006.
These tax returns, however, give us just a glimpse of what the McCains’ income might actually be. The campaign refuses to release anything but Mrs. McCain’s 1040 tax form, which provides only a fraction of the information she is reporting to the Internal Revenue Service. Most of the McCains’ decline in income between 2006 and 2007 was in “Schedule E” income. Schedule E is a form where income from a wide variety of sources is reported—including trusts and a type of closely held (often family-owned) business.
There is a great deal of income legally sheltered from taxation in the machinations underlying the Schedule E. Without having Mrs. McCain’s complete records it is impossible to know for sure whether the McCains actually did better or worse in 2007 than in 2006—their accountants may just have been able to legally shelter more income. Having that information would be helpful in fleshing out the McCains and Obamas as examples of how the tax proposals affect the well-off. Having a firm grasp of their income would give us a better feel for the equity of their tax proposals.
Sen. McCain’s new Pension and Family Security Plan affects the McCains’ taxes by cutting the top rate for taxing capital gains in half—to 7.5 percent from 15 percent. This brings us to another observation regarding Cindy McCain’s tax returns—it is an example of how the wealthy quite consistently accrue capital gains income as an important source of total income, unlike most people who report capital gains (if at all) only sporadically throughout their lives. In 2006, the McCains reported a total of $743,476 in capital gains. In 2007 they reported $746,395. Had the capital gains rate been 7.5 percent instead of 15 percent in those years Sen. McCain and his wife would have saved $110,310 in taxes over those two years.
The Obamas, who rely primarily on earnings from Sen. Obama’s books and their wages, reported small capital losses for both 2006 and 2007.
The McCain Pension and Family Security Plan, in addition to the lower the rate on capital gains, increases the amount of capital losses that taxpayers can use to offset other income (without getting into the thorny details, the reason these losses are limited is that without a limitation there are huge tax sheltering possibilities). The Obamas would have saved $1,427 from this provision over the two years.
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Vice President, Economic Policy