Sunday, February 14, 2010

Obama Didn't Cut Taxes

Steve Benen and Blue Texan are attacking the tea partiers as "idiots" because they allegedly didn't know that the president "cut taxes." (Via Memeorandum.) Benen links to PolitiFact's analysis of the president's statement at the state of the union that "We cut taxes for 95 percent of working families."

But the administration has not cut taxes. It has offered "tax relief" through "tax credits" for wage earners (not the same as tax cuts). Obama, all about gimmicks, has basically been handing out tax rebates like candy while claiming he's the second coming of Ronald Reagan. But here's some analysis:

From the Wall Street Journal, discussing the Obama tax plan in October 2008: "
Obama's 95% Illusion: It Depends on What the Meaning of 'Tax Cut' Is":

One of Barack Obama's most potent campaign claims is that he'll cut taxes for no less than 95% of "working families." He's even promising to cut taxes enough that the government's tax share of GDP will be no more than 18.2% -- which is lower than it is today.

It's a clever pitch, because it lets him pose as a middle-class tax cutter while disguising that he's also proposing one of the largest tax increases ever on the other 5%. But how does he conjure this miracle, especially since more than a third of all Americans already pay no income taxes at all? There are several sleights of hand, but the most creative is to redefine the meaning of "tax cut."

For the Obama Democrats, 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." 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.

Here's the political catch. 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.

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 Heritage Foundation's Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.

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.

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.
Now, see also Peter Ferarra, "Tax Cut Mirage":

... the Obama tax cut package studiously avoids any reductions in tax rates anywhere. The centerpiece of the plan is a $500 per worker tax credit, estimated to cost $150 billion. The government will just borrow $150 billion from the private economy to give away in these tax credits, so there will be no net gain to the economy. Nor will there be any improved incentives to save, or invest, or start or expand a business, or hire new workers. The credit does not even provide increased incentives to work, because once the worker is over a very low income threshold of about $8,000 per year, the amount of the credit does not increase for increased work and income.
Interestingly, even the source Benen relies on, PolitiFact, highlights the fact of tax rebates, not reductions in marginal tax rates:

During the campaign, the independent Tax Policy Center researched how Obama's tax proposals would affect workers. It concluded 94.3 percent of workers would receive a tax cut under Obama's plan based on the tax credit to offset payroll taxes. According to the analysis, the people who wouldn't get a tax cut are those who make more than $250,000 for couples or $200,000 for a single person. Obama said he intended to raise taxes on those high earners, a promise he reiterated during the State of the Union, and that revenue would offset the stimulus tax cut.
And on the administration's proposed budget, the Heritage Foundation has this, "Obama's Budget Seeks $2 Trillion More in Spending and Deficits Than Last Year":

Addressing Runaway Spending by Raising Taxes

Over the last 40 years, budget deficits have averaged a sustainable 2.4 percent of GDP. Under a budget baseline that assumes current policies continue, nearly 90 percent of the expanded budget deficits by 2020 would be caused by higher spending, while just over 10 percent would be caused by lower revenues--and even that assumes the extension of the 2001 and 2003 tax cuts.

Yet President Obama bases nearly all of his (modest) deficit reduction on tax increases. Although no economic theory justifies raising taxes during a recession, he would impose nearly $1 trillion in tax hikes for 3.2 million upper-income families and small businesses. He would eliminate tax breaks for charitable giving and the mortgage interest deduction for millions of Americans.
But of course, brilliant Benen and brainy Blue Texan are in good company:

And I almost forgot: Obama is on the verge of repudiating his campaign pledge that he wouldn't raise taxes on the middle class (those earning less that $250,000 a year). See, "Obama's Middle-Class Tax Pledge in Question as Deficit Challenge Looms."


Steve Burri said...

Second to last line,'...his campaign pledge that he wouldn't raise taxes on the middle class (those earning less that $25,000 a year)', do you mean $250,000?

AmPowerBlog said...

Thanks Steve! All fixed!!