Barack Obama's tax plan is the opposite of supply-side economics. He
proposes to raise marginal rates for just about every federal tax. He
also proposes a raft of tax credits that taxpayers can receive if they
engage in various government-specified activities.
Moreover, the tax credits would mostly go to those who pay little or
nothing in federal income taxes. His trick is to make the tax credits
"refundable." Thus, if the tax credit is for $1,000, but the taxpayer
would otherwise only pay $200 in taxes, the government would write a
check to the taxpayer for $800. If the taxpayer pays nothing in federal
income taxes, the government would pay him the whole $1,000.
Such credits are not tax cuts. Indeed, they should be called The New
Tax Welfare. In effect, Mr. Obama is proposing to create or expand a
slew of government spending programs that are disguised as tax credits.
The spending on these programs is then subtracted from the total tax
burden, in order to make the claim that his tax plan is a net tax cut
overall.
On the tax side of the ledger, the details released by his campaign
last week confirm what a President Obama has in mind for our most
productive citizens. The top individual income tax rate, for example,
would be increased by 13%, to 39.6%; the next-highest rate would be
raised to 36%. The top rates on capital gains and dividends would rise
by a third, to 20%
The Social Security payroll tax would be raised between 16% to 32% for
families making over $250,000 a year. This means that the real returns
these people get from their lifetime payments into the retirement
program will be driven below 0%, according to my own previous research,
which was published by the Cato Institute and elsewhere.
Mr. Obama also wants a permanent federal estate tax, with a top rate of
45%; his health-insurance plan includes a new payroll tax on employers;
and he also contemplates several increases in the corporate income tax,
including a new so-called windfall profits tax on oil companies.
Then there is the spending side of the ledger. Mr. Obama proposes a
fully refundable Making Work Pay Tax Credit, which would have the
government pay out $500 to each worker and $1,000 to couples --
reminiscent of George McGovern's 1972 election proposal for the
government to send a $1,000 check to everyone.
His American Opportunity Tax Credit would provide a $4,000, fully
refundable tax credit for college tuition expenses. His Mortgage
Interest Tax Credit would provide a 10% credit -- refundable -- to
offset mortgage interest payments for lower- and middle-income
families. His Health Care Tax Credits, which the campaign says "will
ensure that health insurance is available and affordable for all
families," include "a new refundable 50 percent health tax credit on
employee premiums paid by employers."
Currently existing tax credits would also become spending programs in
the Obama tax program. The Savers Credit would be made fully
refundable, and would be expanded, according to the campaign, "to match
50% of the first $1,000 of savings for families that earn under
$75,000." The Child and Dependent Care Tax Credit would be made
refundable and expanded to allow "low-income families to receive up to
a 50 percent credit on the first $6,000 of child care expenses."
The Earned Income Tax Credit is already refundable. Mr. Obama would
expand it to "increase the number of working parents eligible for EITC
benefits, increase the benefits available to noncustodial parents who
fulfill their child support obligations, increase benefits for families
with three or more children, and reduce the EITC marriage penalty,
which hurts low-income families." In short, welfare spending is to be
increased by paying more money out to low-income income tax filers.
The latest Congressional Budget Office data shows the bottom 40% of
income earners already pays no income taxes. Indeed, they receive a net
payment from the federal income tax system -- meaning from the
taxpayers -- equal to 3.8% of all federal income taxes, because of the
refundable tax credits under current law. The middle 20% of income
earners, the true middle class, pays 4.4% of federal income taxes.
Overall, the bottom 60% of income earners pay less than 1% of federal
income taxes on net. When "tax credits" primarily go to this group in
the form of checks from the government (rather than a reduction in
their tax burden) it is simply an abuse of the language to call the
spending a tax cut.
Consequently, to say, as the campaign does say, that the candidate's
tax plan is a tax cut on net -- and that it would limit taxes to 18.2%
of GDP -- is grossly misleading. The Obama tax plan would sharply
increase real taxes. It also would come nowhere near to paying for the
massive increases in federal spending he has proposed, including the
spending that is disguised in the form of refundable tax credits.
Mr. Ferrara is director of
entitlement and budget policy for the Institute for Policy Innovation.
He served in President Reagan's White House Office of Policy
Development, and as associate deputy attorney general under the
President George H.W. Bush.
