Senator Obama has oft repeated the claim that he will lower the taxes on 95% of all taxpayers. You've heard him. He made the claim at the last debate and continues to make it on the campaign trail.
So let's be clear about my tax plan and Sen. McCain's, because we're not going to be able to deal with entitlements unless we understand the revenues coming in. I want to provide a tax cut for 95 percent of Americans, 95 percent.
If you make less than a quarter of a million dollars a year, you will not see a single dime of your taxes go up. If you make $200,000 a year or less, your taxes will go down.
So let's be clear about his tax plan. Today, 44% of Americans do not pay taxes at all. Yet Senator Obama assures us that " If you make $200,000 a year or less, your taxes will go down." So how can your taxes go down if you do not pay taxes? Easy, it's called Tax Credits.
Mr. Obama is proposing to create or expand no fewer than seven such credits for individuals:
- A $500 tax credit ($1,000 a couple) to "make work pay" that phases out at income of $75,000 for individuals and $150,000 per couple.
- A $4,000 tax credit for college tuition.
- A 10% mortgage interest tax credit (on top of the existing mortgage interest deduction and other housing subsidies).
- A "savings" tax credit of 50% up to $1,000.
- An expansion of the earned-income tax credit that would allow single workers to receive as much as $555 a year, up from $175 now, and give these workers up to $1,110 if they are paying child support.
- A child care credit of 50% up to $6,000 of expenses a year.
- A "clean car" tax credit of up to $7,000 on the purchase of certain vehicles.
So where does this money come from?
All but the clean car credit would be "refundable," which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer -- a federal check -- from taxpayers to nontaxpayers. Once upon a time we called this "welfare," or in George McGovern's 1972 campaign a "Demogrant." Mr. Obama's genius is to call it a tax cut.
So for all those people who do not pay taxes, they are not getting a tax cut: they are getting a transfer payment.
Now clearly that money has to come from somewhere.
But the most alarming thing about Mr. Obama's proposal is that the $250,000 threshold, above which the payroll tax would be applied, refers to household income, not individual income. So it's quite deceptive when he claims that the $250,000 threshold will "ensure that lifting the payroll tax cap does not ensnare any middle class Americans."
Suppose your household consists of you and your spouse, each earning wages of $150,000 per year. Currently, you are each subject to the payroll tax up to $102,000 of wages, so together you are taxed on $204,000. Under the Obama plan, you'd be taxed again on another $50,000 of wages.
At the current payroll tax rate of 12.4% – 6.2% from wage-earners and 6.2% from their employers – your household would be looking at a tax hike of $6,200 per year. You probably didn't consider yourself rich before, and you certainly won't after paying that tax bill.
And it is, at the moment, an open question as to whether this $250,000 threshold applies to interest on savings and capital gains income.
Now one of the things these tax credits do is erase the payroll taxes for people who receive them. So they won't be contributing to Social Security and Medicare. But they will collect from it.
The political left defends "refundability" on grounds that these payments help to offset the payroll tax. And that was at least plausible when the only major refundable credit was the earned-income tax credit. Taken together, however, these tax credit payments would exceed payroll levies for most low-income workers.
And it will cost us in the long run
The total annual expenditures on refundable "tax credits" would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center. This means that the tax-credit welfare state would soon cost four times actual cash welfare. By redefining such income payments as "tax credits," the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is.
Now Obama defends this by saying he'll be raising payroll taxes on households earning more than $250,000 but they won't be getting higher benefits.
And neither has Mr. Obama said whether the rich – and, truth be told, the middle class – paying his new higher taxes will get correspondingly higher Social Security benefits when they retire. Throughout the history of the Social Security program, there has always been a connection between what you contribute in taxes and what you get back in benefits. If Mr. Obama uncaps the wages subject to tax, but doesn't uncap benefits, then he has severed the link between them. Social Security would stand revealed not as a work-related contributory retirement system, but simply as a tax-funded welfare and income-redistribution program.
And for all that, Mr. Obama's proposal won't help Social Security's long-run solvency problems.
Further, the Obama plan actually increases the tax rate for those who earn the credits, so when the government decides that they can no longer afford to pay the Tax Credit, those people who were getting them will all of a sudden be in a higher tax bracket and wind up paying more taxes than they would have before the Tax Credits were installed.
There's another catch: Because Mr. Obama's tax credits are phased out as incomes rise, they impose a huge "marginal" tax rate increase on low-income workers. The marginal tax rate refers to the rate on the next dollar of income earned. As the nearby chart illustrates, the marginal rate for millions of low- and middle-income workers would spike as they earn more income.
Some families with an income of $40,000 could lose up to 40 cents in vanishing credits for every additional dollar earned from working overtime or taking a new job. As public policy, this is contradictory. The tax credits are sold in the name of "making work pay," but in practice they can be a disincentive to working harder, especially if you're a lower-income couple getting raises of $1,000 or $2,000 a year.
In short, Senator Obama's plan will incentivize the poor to remain poor while at the same time provide disincentive to make money, open small businesses and create jobs.
Now that's change.
But it's not small change.
