Obama, McCain pitching costly economic proposals

With debate set for tonight, some analysts skeptical

BLUE BELL, Pa. - In the latest, clearest sign that the economy is driving the presidential election, both Barack Obama and John McCain are pitching costly new proposals to more directly help families and businesses squeezed in the financial storm.

But both plans drew quick skepticism from analysts who questioned how the ideas will be paid for and if they would work.

The new plans put forward by Obama and McCain this week - on the eve of their final debate tonight - are designed to appeal to each of their base constituencies and reflect the philosophies of their political parties.

Obama went first, proposing Monday in economically stressed Ohio a rather traditional Democratic prescription of benefits aimed to the middle class and elderly, plus a $3,000-per-job corporate tax credit for new hires. Price tag: $60 billion over two years, according to his campaign.

McCain, in a Philadelphia suburb yesterday, outlined a Republican program of tax cuts heavily tilted toward helping the wealthy and elderly, including slashing in half the tax rate on long-term capital gains to 7.5 percent in 2009 and 2010 and allowing people to deduct as much as $15,000 in stock market losses, five times more than now allowed. Cost: $52.5 billion over two years, his campaign said.

"If I am elected president," McCain said, "I will help to create jobs for Americans in the most effective way a president can do this - with tax cuts that are directed specifically to create jobs, and protect your life savings."

Obama's campaign dismissed McCain's plan as offering little to help the middle class. "His trickle-down, ideological recipes won't strengthen our economy and grow our middle class," spokesman Bill Burton said.

Roberton Williams, a specialist at the nonpartisan Tax Policy Center, questioned whether either plan would have much long-term impact. "Neither one is paid for, and it is not clear that either one would have much positive effect on the economy," he said.

Robert Carroll, vice president for economic policy at the nonpartisan Tax Foundation, said the plans seemed to be modest efforts to attract voters. He said it would make more sense to see whether the $700 billion financial system bailout - approved by Congress this month with the votes of both Obama and McCain - works before trying to enact costly new proposals. "The candidates seem to be reacting to the current economic difficulties with a sort of haphazard and not well thought out new tax ideas," Carroll said.

"Reactions to crises generally do not produce good tax policy," added Daniel M. Berman, a former Clinton administration Treasury Department official who is director of the graduate tax program at the Boston University School of Law.

But the candidates insisted their respective plans would help boost the economy with carefully targeted measures that would help hard-hit taxpayers and businesses who wouldn't get help quick enough from the bailout of the financial system, which now includes the direct investment of $250 billion by the government in the nation's biggest banks.

The plans being offered are in addition to broader jobs and tax measures previously proposed by both candidates. Obama has proposed extending tax cuts now slated to expire in 2010 for all families earning less than $250,000, while McCain has said the cuts should be extended for everyone, regardless of income.

That difference - on whether to put a heavier tax burden on the wealthiest Americans - was amplified in the new measures offered this week.

McCain framed some of his new initiatives as a reaction to Obama's proposal Monday to allow individuals to withdraw as much as $10,000 from retirement accounts without penalty this year and in 2009, a policy that McCain said would encourage people to further drain the cash-strapped financial system. McCain proposed suspending a rule that requires retirees to withdraw money from retirement plans starting at age 70 1/2 so account holders do not have to sell their holdings at a loss.

But analysts said McCain's plan might also encourage the exodus of capital. McCain's plan, for example, would halve the tax rate for the next two years on capital gains on assets held for more than a year. As a result, according to Williams of the Tax Policy Center, an investor might be tempted to sell off stock to take advantage of a lower tax bill.

McCain also proposed giving a break to investors who sell at a loss, increasing the amount of capital losses that can be deducted from $3,000 to $15,000 a year for the next two years.

By making it more profitable for investors to take their gains, and by reducing the impact of selling at a loss, McCain will mostly be helping the wealthiest taxpayers. About 75 percent of capital gains go to individuals earning at least $600,000 a year, and half of the gains go to those earning $2.8 million or more, Williams said. The theory behind McCain's plan is that such individuals will use their profits to invest in companies to create jobs.

Obama questioned McCain's focus on capital gains, telling reporters in Ohio that since "nobody really has capital gains right now . . . that probably is not going to be particularly useful in solving the financial crisis."

Obama, by contrast, says he can create jobs by giving a $3,000 tax credit for each new hire in 2009 and 2010. It is not clear whether a business would create a new job as a direct result of the tax credit, or whether the credit will go to companies that would have had new hires in any event.

After McCain unveiled his ideas, some in the Pennsylvania audience were not sure what to make of them. "I didn't understand some of it," said Dave Boring, 48, a salesman.

Other supporters acknowledged McCain could do more to connect with voters over their concerns about the economy. "He's not been forceful enough," said Betty Shyer, 71, a retired secretary from nearby North Wales. "Don't sugarcoat it."

Kranish reported from Wash- ington and Issenberg from Blue Bell, Pa.