Obama's 95% Illusion

I recently posted an article about problems with Democratic presidential nominee Barack Obama's tax plan, or more specifically, his promise to cut taxes for 95 percent of working Americans.

The Wall Street Journal online covered this same topic October 13, and being the Wall Street Journal, did more justice to the story than I could have hoped for. The following are excerpts of the key parts of the Journal's story. The entire article can be found here.

"One of Barack Obama's most potent campaign claims it that he'll cut taxes for no less than 95% of 'working families.'" The Journal calls it "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," the Journal asks, "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.'"

As I argued in my post, Obama's tax "cut" really amounts to a redistribution of wealth from some taxpayers to others. As the Journal notes, "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.'"

Some of the credits promised by Obama include a "make work pay" credit, a college tuition credit, a mortgage interest tax credit, a "savings" tax credit, an expanded earned income tax credit, a child care tax credit, and a "clean car" tax credit.

But there's a catch. According to the Journal, "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."

The Journal cites the Tax Foundation as estimating 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."

Proponents of this refund policy often claim that those not paying income taxes still have payroll taxes deducted from their checks. While I didn't address this fact in my article, the Journal says, "...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."

Further, the Journal says, "Because Mr. Obama's tax credits are phased out as income rises, they impose a huge 'marginal' tax rate increase on low-income workers." In closing, the Journal says, "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."