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WebMemo #2105 on Economy

October 17, 2008

Job Creation from the Obama and McCain Tax Plans: A State-by-State Analysis

By

A recent Heritage Foundation Center for Data Analysis report[1] describes the economic outcomes that can be expected based on the presidential candidates' proposed tax plans. The outcomes include the effects of these proposed policies on gross domestic product, disposable income, and employment growth over a 10-year period.

The analysis finds that job growth under Senator John McCain's (R-AZ) plan at the national level is more than two times faster than job growth under Senator Barack Obama's (D-IL) plan. Table 1 shows the average yearly employment gain that can be expected in each state as a result of McCain's and Obama's tax plans.[2]

Job creation grows faster in McCain's plan because of the plan's pro-growth provisions. The McCain proposal includes lower tax rates for businesses and allows businesses to deduct the cost of new purchases of equipment and technology in the first year. Both of these proposals lower business expenses, leaving more money for business owners to use for employment and operation purposes. Owners will use this money to hire new staff, purchase more materials, and invest more in research and development activities.

Table 1

Obama's plan relies chiefly on a series of tax credits in order to redistribute income. These credits will serve to boost consumption, creating some demand for new employment. However, tax credits will not boost business investment, which influences employment outcomes in other sectors of the economy. As a result, none of the trickle down employment effects observed as a result of McCain's tax cuts result from Obama's tax credits.

Shanea J. Watkins, Ph.D., is Policy Analyst in Empirical Studies in the Center for Data Analysis at The Heritage Foundation.

Show references in this report

[1] William W. Beach et al., "The Obama and McCain Tax Plans: How Do They Compare?" Heritage Foundation Center for Data Analysis Report No. CDA08-09, October 15, 2008, at http://www.heritage.org/Research/Economy/cda08-09.cfm.

[2] The Center for Data Analysis used a version of the Global Insight (GI) baseline forecast and the U.S. Macroeconomic Model to simulate the economic effects of adopting the McCain and Obama tax proposals. This model is provided to The Heritage Foundation by IHS Global Insight, Inc., of Lexington, Massachusetts. The methodologies, assumptions, conclusions, and opinions in this CDA Report are entirely the work of CDA analysts. They have not been endorsed by and do not necessarily reflect the views of the owners of the GI model. The GI model is used by leading government agencies and Fortune 500companies to provide indications to policymakers of the probable effects of economic events and public policy changes on hundreds of major economic indicators. State estimates were calculated by multiplying each state's share of total national employment to the macroeconomic estimates of each of the tax plans. For example, the population of employed people in California accounts for almost 12 percent of employment nationwide. In order to calculate the percentage of jobs California would stand to gain as a result of the candidates' tax plans, this percentage was multiplied by the national estimates of job change from the macro model. State employment data for July 2008 was collected from the U.S. Department of Labor, Bureau of Labor Statistics, Civilian labor force and unemployment by state and selected area, seasonally adjusted, table 3, at http://www.bls.gov/news.release/laus.t03.htm (September 29, 2008).

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