Citation URL: http://www.urban.org/RobertonWilliams

Listen to Roberton Williams, an expert on federal tax and budget issues, discuss McCain and Obama's tax plans and break down their differences.

Listen to Roberton Williams, an expert on federal tax and budget issues, explain what the McCain and Obama tax plans mean for voters.

The presidential candidates have all called for simplifications to the tax code. The U.S. tax system does much more than raise revenue; it redistributes income and rewards certain choices, like having children, going to college, and saving for retirement. And even the simplest taxes need detailed rules and collection mechanisms.

One measure of the tax burden imposed on households is their effective tax rate (ETR)—the total taxes they pay measured as a percentage of their pretax income. ETRs vary across types of households because of differences in sources and levels of income and in how the tax system treats taxpayers in different situations. Each year the Congressional Budget Office estimates ETRs for individual and corporate income taxes, payroll taxes, and excise taxes for different types of households, as well as all households as a group.

The federal, state, and local governments collected nearly $3.9 trillion in revenue in 2004, roughly one-third of GDP. Almost half that amount went to the federal government, which turned around and passed more than $400 billion on to state and local governments (90 percent to the states). For their part, the states brought in almost $1.2 trillion of their own revenue, 30 percent of which they passed on to local governments to help finance education and other activities. Finally, local governments used property taxes and other sources to collect nearly $800 billion.

The past 75 years have seen marked changes in the sources of federal revenue. In 1934 excise taxes accounted for almost half of all revenue, and income taxes were about one-fourth; payroll taxes barely registered on the scale. Individual income taxes and payroll taxes now account for nearly 80 percent of federal revenue and corporate income tax revenue makes up about two-thirds of the rest. This article discusses these changes in the shares of federal tax receipts by source from 1934 to 2006.

The paper describes the new standard deduction for health insurance, proposed in the FY2008 Budget, and evaluates the extent to which it would meet its stated goals of expanding health insurance coverage and restraining healthcare spending, and its effects on the distribution of tax burdens in the short and long terms. The basic approach would improve the market for health insurance, but inadequate attention was paid to problems in the nongroup market or those facing households with low incomes. In consequence, the plan could actually reduce overall insurance coverage. The paper suggests a variety of ways in which the proposal could be improved so more people would be covered, including those with low incomes or in poor health.

The paper describes the basic features of the President's plan and evaluates the extent to which it would meet its stated goals of expanding health insurance coverage and restraining healthcare spending. The basic approach would improve the market for health insurance, but inadequate attention was paid to problems in the nongroup market or those facing households with low incomes. In consequence, the plan could actually reduce overall insurance coverage. The paper suggests a variety of ways in which the proposal could be improved so more people would be covered, including those with low incomes or in poor health.

Williams outlines several current issues in federal tax policy including recent trends, changing tax law, the alternative minimum tax, and the effects of EGTRRA. Graphs and charts reveal sources of federal revenue, federal revenues in relation to GDP, and the distribution of taxes, as well as the effects of EGTRRA.

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