From the WSJ:
The Election Choice: Taxes

When it comes to taxes, the difference between Barack Obama and John McCain is arguably as wide as it's been in a presidential race since Ronald Reagan and Walter Mondale battled in 1984. Sen. Obama is proposing to raise taxes more than any recent candidate, while Sen. McCain wants to cut them substantially. Most of the campaign debate has been over whose taxes would be raised, and whose cut.

Here are the facts:

Mr. Obama would roll back the 2001 and 2003 tax cuts for taxpayers in the top two brackets, raising the top two marginal rates of income tax to 36% and 39.6% from 33% and 35%. The 33% rate begins to hit this year at incomes of $164,550 for an individual and $200,300 for joint filers. Mr. Obama claims no "working families" earning less than $250,000 would pay more in taxes, but that's because he defines income more broadly than the taxable income line on the IRS form. If you're an individual with taxable income of $164,550, you will pay more taxes.

The Democrat would also reinstate the phaseout of the personal exemptions and itemized deductions for married couples making more than $250,000 a year. Those phaseouts would raise the top marginal tax rate for millions of taxpayers by another 1.5 percentage points.

Capital gains and dividend taxes would increase to 20% from 15% for those making more than $250,000, although capital-gains taxes on investments in "start-ups" would be eliminated.

Mr. Obama's most dramatic departure from current tax policy is his promise to lift the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $102,000, a level that is raised for inflation each year. The Obama campaign says he'd raise the payroll tax rate on incomes above $250,000 by as much as two to four percentage points -- though it's unclear if that higher rate would apply to the employee, the employer, or both.

In any case, lifting the cap would change the nature of Social Security from an insurance program -- which pays out based on how much you paid in -- into a wealth-transfer program that is far more progressive.

Taken together, these add up to about a 10-percentage-point hike in marginal tax rates for those making more than $250,000 a year, including millions of small businesses that pay taxes at individual rates. The "marginal" rate refers to the rate paid on the next dollar of income, and it has an especially strong influence on decisions to work and invest.

Meanwhile, House Ways and Means Chairman Charlie Rangel has proposed an additional 4% "surtax" on incomes above $200,000. This would further increase the top marginal federal income tax rate to close to 50% -- or slightly above that, depending on the rate of the new Social Security tax -- when combined with Mr. Obama's hikes.

Mr. Obama is also famously promising that 95% of all Americans will get a tax cut. However, he would not reduce tax rates. His tax cuts come in the form of tax credits, most of which are also "refundable." In tax jargon, "refundable" means that you get the credit even if you owe no income taxes at all -- which means the government cuts you a check. These credits include:

- a credit of $500 to offset the payroll tax on the first $8,100 in earnings;

- a 10% mortgage-interest credit for those who don't itemize their deductions and so don't currently benefit from the mortgage-interest deduction;

- an expansion of the earned-income tax credit that would raise the income eligibility, reduce the EITC "marriage penalty," and increase payouts for families with three or more children;

- an increase of the college tuition tax credit to $4,000, from $1,800;

- a 50% "savers" credit of up to $500.

- The child-care credit would be made fully refundable and the credit increased to 50% of child-care costs, from 20%-35% now.

According to the Tax Policy Center, Mr. Obama's tax credits would increase the share of Americans who pay no income tax to 48% from an estimated 38% this year.

On corporate taxes, the Obama campaign has proposed to eliminate "loopholes" for oil and gas companies and rewrite the rules for how multinational corporations are taxed. In particular, he has proposed to treat foreign-source income the same as income earned domestically -- which means subjecting all income earned by American companies around the world to the 35% U.S. corporate rate, which is the world's second-highest. He is also promising a "windfall profits" tax on oil companies.

As for Mr. McCain, the central plank of his personal income-tax proposals is to make permanent almost all of the 2001 and 2003 tax cuts. This would leave the top marginal rate at 35%. The one exception is the death or estate tax, which expires for one year in 2010. Mr. McCain wants a 15% death tax on estates larger than $5 million. Mr. Obama wants a 45% rate on estates larger than $3.5 million.

Mr. McCain would also increase the dependent exemption by two-thirds -- to $6,000 per dependent from $3,500.

Mr. McCain would lower the corporate income-tax rate to 25% from 35% today, and allow full expensing, temporarily, of some investments in plant and equipment. Like Mr. Obama, Mr. McCain has said he would "close loopholes" on oil and gas companies and reconfigure the tax regime for multinationals.

The Republican's most dramatic proposal is to introduce an optional simplified tax system with only two rates and larger standard deductions and exemptions. Although Sen. McCain first put forward this proposal months ago, the details of it remain sketchy. In rough outline, taxpayers would be able to choose to pay under the current tax code or file under the optional semiflat tax.

Both candidates have said they would permanently index the Alternative Minimum Tax to inflation. In reality, both would have to do far more to change the AMT, which hits more middle-class taxpayers each year, and which members of Congress have many proposals to alter or repeal.

In sum, Mr. Obama is proposing to use the tax code to substantially redistribute income -- raising tax rates on a minority of taxpayers to finance tax credits and direct income supplements to millions of others. How much revenue his higher rates would raise depends on how much less those high-earners would work, or how much they would change their practices to shelter their income from those higher rates.

By contrast, Mr. McCain is proposing some kind of tax reduction for most Americans who pay taxes. He says he would finance those cuts by reducing the rate of growth in federal spending.
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