Following Barack Obama’s proposals announced earlier, Republican candidate John McCain has outlined the steps he would take as president to help spur the economy in the United States.

1. Eliminate taxes on unemployment benefits. Like the Democratic candidate, McCain suggests eliminating taxes on unemployment insurance to make sure that those individuals out of work have a better chance of paying their rent, mortgage, or other necessities each month. He stops short of extending benefits over a longer period of time.

2. Cut the capital gains tax to 7.5% for two years. This will inspire more investment in businesses, which in theory “trickles down” to the rest of the economy. McCain would also reduce the tax rates on IRA and 401(k) withdrawals (up to $50,000) to 10%, the lowest tier.

3. The government should only buy shares in private banks until they are sound. McCain isn’t happy about the plan to partially nationalize private institutions, but he seems to agree that Bush’s plan is solid in the immediate term.

4. The Treasury Department should guarantee 100% of all savings for six months. The FDIC recently increased the insurance limits on deposits to $250,000 from $100,000, which means more of your money is “safe” in banks. I don’t know many individuals who keep this much money earning miniscule interest rates in savings.

The original increase to $250,000 was a move that would help small banks attract deposits of large corporations that spread enormous amounts of cash across many institutions. McCain’s plan to insure without limit eliminates the need for large corporations to spread their cash around to smaller banks. This might result in more money being concentrated in a smaller number of banks.

I don’t think that this side effect outweighs the psychological benefit that might be presented with the idea that you can “entrust” banks and the FDIC with more of your money.

The price tag on John McCain’s outlined plan in $52.5 billion. What do you think of McCain’s ideas?

Each major presidential candidate is making his presence known and ensuring his name is constantly in the media as next month’s election approaches. Recently, Democratic candidate Barack Obama announced six action steps to help heal the economy in this country and across the world. Five of these are “new” ideas, and one was originally proposed by Republican candidate John McCain.

1. Allow penalty-free withdrawals from 401(k)s and IRAs. For most early withdrawals from retirement accounts, the Internal Revenue Service assesses income tax as well as a 10% penalty. Obama would like to let these withdrawals in 2008 and 2009 slide without penalty. Income taxes would still apply.

This would benefit individuals already planning to make hardship withdrawals, or since the exemption would be retroactive to January 1, 2008, individuals who have already made hardship withdrawals. It shouldn’t be much of an incentive to choose a retirement withdrawals over other options, since the account owner would still owe income taxes on the amount of the withdrawal.

2. Don’t force retirees to take distributions from IRAs and 401(k)s at age 70.5. Normally, individuals are required to draw down their retirement plans. This is a good move when the market is significantly down from last year, as it is right now.

The required withdrawal amount for 2008 is a percentage of your December 2007 balance. Unfortunately, since the market has declined since December 2007, what was 10% of your balance in 2007 may be 20% of your balance today. Removing the forced minimum distribution will allow retirement nest egg balances to recover with the market, assuming the market does in fact recover.

3. Allow the Federal Reserve and the Treasury to lend directly to state and local governments. I’ve seen the yield on the Vanguard New Jersey Tax-Exempt Money Market Fund VNJXX), which invests in state and local bonds in my state decrease since I first invested in the fund a few weeks ago. This could be indicative of the financial problems that might affect this state.

This move could help stimulate local economies through giving states the ability to meet their obligations.

4. Provide a $3,000 tax credit in 2009 and 2010 to companies for every new employee they hire. This move has the possibility of offsetting the price of expensive American labor in comparison to workers oversees. But will this help create new domestic jobs? I’m not sure that $3,000 per hire is enough as an incentive.

5. Extend unemployment benefits and exempt the benefits from income tax. By adding 13 weeks to the unemployment coverage period, Obama intends to provide help for those unemployed for more than six months. Without the IRS collecting tax on unemployment benefits, unemployed workers will have more money to spend on necessities.

Unemployment rates are still historically low, even within this economic crisis. Is Obama preparing for higher unemployment if a recession continues? If the economy does not improve and more people find themselves out of work, will this plan still be affordable?

6. Any financial institute that accepts help from the government will place a 90-day moratorium on foreclosures. This would give the lender and borrower more time to work out an agreement, as long as the borrower is acting in good faith. I have mixed feelings on this. In many cases, homeowners made bad choices when purchasing houses they could not afford, but I can’t expect people to always know the financially correct decision when there was misinformation perpetuated by the mortgage industry.

I’ll take a look at McCain’s suggestions when I receive more information about his plans.

What do you think of Obama’s ideas?

Knight Kiplinger is the editor in chief of Kiplinger’s Personal Finance magazine and Kiplinger.com, and in the November issue, he has published an editorial that gets to the core of what must be done to adapt to today’s economic reality. A link to the online edition of the article was sent to me by a publicity agent, but despite thism I wanted to share it with readers.

Kiplinger, the individual, has nothing to lose by making bold statements about the economy, unlike our presidential candidates who have to worry about alienating voters. The editor in chief does report to the board of directors of the publishing company, so I’m sure he couldn’t fly too far off the handle. Appropriately, the editorial is fitting the rest of the publication.

First, he lists America’s eight toughest economic problems, summarized here:

1. Overconsumption and undersaving by individuals and the federal government
2. Soaring old-age entitlements
3. Addiction to fossil fuels
4. Dependence on imported oil
5. An overly ambitious foreign policy of promoting democracy by forcible regime change
6. Failing public schools and inadequate vocational training
7. Uneven access to health care
8. A broken immigration system

Kiplinger goes on to provide solutions, both governmental and private, for these issues. Some of these solutions may be controversial. For example. here’s what the article proposes to reduce federal spending.

Voters should insist that Congress begin reducing the federal budget deficit, starting first with spending restraint. Tax hikes could come later—but only if proved to be needed.

My nominees for frozen or gradually reduced federal spending: military hardware; a wide array of subsidies to business, especially energy and agriculture; and health care for the elderly and poor (not less care, but more efficiently delivered).

My candidates for higher federal spending: support for elementary and secondary education, basic scientific research, and infrastructure (bridges, airports, harbors and parks).

The article contains a number of interesting suggestions for improving the economy and the quality of living in the United States. Read the article, A New Economic Agenda.

The stock market was hoping for good news today regarding the bailout bill. When the House of Representatives voted down the proposal which had support from only 60% of Democrats and 30% of Republicans, the Dow Jones Industrial Average, S&P 500 Index, and the price of oil dropped sharply.

With pressure from the Executive branch, I figured the Legislative branch would fold as quickly as they did with the PATRIOT Act when the immediate threat was terrorism rather than economic crisis. It should be interesting to see how this plays out, but I’ll try not to look at my investments until then. Perhaps I’ll use sharp downturns like today as buying opportunities.

Thanks to Matt from Web Developer Guru who just a few minutes ago wrote in to let me know about this latest development. The FBI is investigating the financial firms primarily involved with the recent economic collapse, Lehman Brothers, Fannie Mae, Freddie Mac, and American International Group (AIG), and those who have been running these companies, for potential fraud.

The FBI also investigated IndyMac after that bank failed earlier this year.

FBI Probing Bailout Firms, Associated Press, September 23, 2008