Monday, October 27, 2008

The essential difference between Obama and McCain

If one were to ask the average US voter what the difference between the two candidates on domestic policy was, other than say one would tax the rich while the other would reduce taxes on large corporations and wealthy, they would not be able to say anymore.

In Obama’s case he is proposing two main platforms that will impact on the voter, which should form the basic premise of his platform. The first is a tax cut for those earning less than $250,000 per annum, and the second is the insistence of employers providing health insurance for their employees, along with tax credits to them for so doing.

Taking the first matter, one must appreciate some of the basics of US taxes. While 40% of workers in the US do not pay federal income tax as they earn very little, one must appreciate that payroll taxes, such as social security is deducted from the first dollar they earn, and amount is also contributed by the employer. These 40% will be entitled to a non-refundable tax credit of a $1000, which is effectively a subsidy from the government.

The effective result of this is to permit a consumption increase as the poor spend all their income on living, equivalent to the tax cuts. In a recession, a consumption led growth is more likely than investment led growth and is likely to counter the fall in consumption seen lately with people losing jobs and tightening their previous extravagances.

Taking the second area, namely that of health insurance, it is cheaper to obtain collective policies, in preferences to individual policies that McCain favors. How many employers who are suffering in the downturn can afford health insurance for their workers is a question that has not been adequately addressed. Unless some tax credits are given to smaller employers to provide health insurance the pool of insured will not rise.

While the cost of health insurance is a tax-deductible expense on a company it is not so to an individual. There are 40million Americans without health insurance, and the number will rise when more people lose their jobs. Today’s insurance cost per insured is higher as a result. So the greater the number who are insured, will reduce the average cost, which is the premise on which the Obama plan rests its case. Lets see the percentage of uninsured at the end of Obama’s first term to comment on its effectiveness.
On McCain’s side he complains that Obama is about to make the tax more progressive, which he deems taxing the rich, and rather foolish Palin calls socialism. In an ideal world, one would not need to tax the rich, but in order to reign in the Bush deficit, some revenue has to be generated and the wealthy will pay a greater percentage of their incomes in taxes under Obama. One must bear in mind that payroll taxes stop, for the employee at about $80K so the rate of taxes that the wealthy pay taking this into account is not that much higher. On a flat tax rate, under McCain they will pay a lower proportion of their income in taxes than those earning at that threshold of $80K.

McCain’s other main plan is to provide a $5000 tax credit to the employee to purchase their health insurance privately to encourage the increase of the pool of the insured. One must however realize that because health care is private and run for profit, purchasing individual policies, rather than collective ones pooling a whole group is much more expensive, which is both a cost to the employee and the government that is subsidizing this policy which will go as profit to the health insurer. Remember that health insurance for a family of 4 if one were to purchase amounts to about $20,000 per annum which is a huge chunk of ones income if one is middle class, and not affordable if one is poor, so this $5000 credit amounts to nothing more than a hill of beans!

It is easier to understand the election in this context on how it affects the average American rather than look at other policies, as I believe there is little practical differences over any of the other policies, domestic or foreign between the two candidates though the rhetoric is there to distinguish them.

While no candidate dare talk about reforming the unwieldy tax code, I believe in mid term, serious thought should go into simplifying this when the economy improves, so as to reduce the amount of inefficiencies in the smooth functioning of the economy, which the current code encourages.

Of course none of all this is important if one does not bring in the intangibles, namely that of hope that a bi-racial President will create history and inspire confidence in a new generation of Americans for whom race matters little, and an international audience watching eagerly to see if the US can re-gain the moral high ground in its dealings with the rest of the world, which has hitherto taken a beating during the Bush Presidency. Sadly the festering sore, that is the blind support for Israel will be a permanent crutch.

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