The Homa Files

Excerpted from WSJ: ” Obama’s 95% Illusion”, Oct. 13, 2008

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One of Obama’s most potent campaign claims is that he’ll cut taxes for no less than 95% of “working families” … (and cut aggregate income taxes).

How does he conjure this miracle, especially since more than a third of all Americans already pay no income taxes at all? First, by proposing one of the largest tax increases ever on the other 5%.

There are several sleights of hand, but the most creative is to redefine the meaning of “tax cut.”

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For Obama , a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase “tax credit.”  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 $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.

Here’s the political catch. The credits  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.”  Mr. Obama’s genius is to call it a tax cut.

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The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year.

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.  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.

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. The marginal rate for millions of low- and middle-income workers would spike as they earn more income.

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Full article:
http://online.wsj.com/article/SB122385651698727257.html

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This entry was posted on October 13, 2008 at 7:59 am and is filed under Government & Politics, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.