Sun Blogs: Left, Right or Wrong?
The Tax Cut Fallacy
October 22, 2008 - 9:34amOne of the great debates in politics concerns the merits of tax cuts versus tax increases. Traditionally, the Republican Party has preached supply-side economics and tax cuts as means to stimulate growth and investment, whereas the Democratic Party has claimed that tax cuts for only the middle-class will be effective and tax increases elsewhere are beneficial. While both Barack Obama and John McCain have tax plans that are far from perfect, issue should be taken with Sen. Obama’s plan, particularly his claim that 95 percent of workers who earn less than $250,000 will receive a tax cut. It is simply not true.
A graph depicting how effective marginal tax rates will be impacted as a result of each candidates' tax policies.: (Tax Policy Center)
At the heart of Obama’s tax policy is the refundable tax credit (John McCain relies on refundable tax credits for healthcare, but they are utilized in a different way). This tax credit allows total tax liability to be reduced to below zero. Say that a couple pays $1,000 in income taxes per year. Assuming that there is a $2,000 refundable tax credit and that this couple qualifies for the tax credit, the couple would receive a check from the government in the amount of $1,000, according to Obama’s plan. The same applies to those who pay no income taxes, meaning that they would be receiving a subsidy from the government. Not to mention the fact that anywhere from 35 to 41 percent of Americans would pay no income taxes. The Tax Foundation estimates that approximately 44 percent of all tax filers will have zero income tax liability under this proposal, as reported in an article in the Wall Street Journal.
Some may claim that the idea behind the refundable tax credit is to offset the regressive payroll tax. However, with all of the tax credits that Obama is proposing, the payroll tax is more than offset. Furthermore, while payroll taxes are regressive, the benefits received from them are, to some extent, progressive. The fact of the matter is that the refundable tax credit is in essence a form of wealth redistribution. Now, this is not to say that McCain’s tax plan is superior to that of Obama. The false advertising concerning this policy, however, should be exposed and understood by voters.
As a Cornell alum, I am
As a Cornell alum, I am particularly disappointed that you so completely misunderstand Obama's tax credit plan. You need to do more research before you opine.
Whaddya know, another
Whaddya know, another Cornell know-it-all who refuses to accept anything anti-Obama.
McCain also proposing refundable tax credit
The "welfare" claim rests on the argument, made in an Oct. 13 editorial in the Wall Street Journal about refundable tax credits. Obama proposes to grant a number of refundable tax credits to low- and middle-income workers. For example, he would give a $500 tax credit ($1,000 for a couple) for workers, which would phase out for single workers making $75,000 or for couples making $150,000 per year.
But McCain himself is proposing refundable tax credits of up to $2,500 a year for individuals, or $5,000 for families, as part of his health care plan. McCain doesn't call his credits a "tax cut" but he doesn't call them "welfare" either. He does call it tax "reform."
McCain Web site: John McCain Will Reform The Tax Code . . . [E]very family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to “offset the cost of insurance.”
McCain makes his tax credit refundable to make it worth just as much to low-income workers as to high-income workers. If it were not refundable, it would be worth $0 to anyone who makes too little to pay any federal income taxes. A non-refundable credit would be worth the full amount only to individuals who owe at least $2,500 in federal income taxes, or couples who owe at least $5,000. Obama makes his tax credits refundable for the same reason – so they will benefit workers who earn too little to pay federal income tax.
Lower the Capital Gains Tax
The next administration really needs to lower the capital gains tax in order to encourage individuals to invest in the markets. If capital gains taxes are lowered, people will be much more likely to invest in equity and transfer money from savings accounts into mutual funds and other equity vehicles.
Obama plans to increase the capital gains tax rate to 20% for couples making more than $250,000 and single filers with incomes greater than $200,000. Though it seems that this increase only affects the wealthiest Americans, these are the Americans who have the most cash to invest. Such an increase would stifle economic growth, and would punish investors. We cannot be punishing investors at this time of financial crisis; we should be rewarding them.
McCain plans to reduce the tax rate to 7.5%. Such a decrease will must spur investment so that we can escape the current financial crisis. In addition, it will reward Americans for investing in the markets.
RE: The Tax Cut Fallacy
A different perspective for readers.
My husband and I were born to poverty on a rural Oklahoma farm, literally on a farm. Born ignorant and penniless, we have worked our fingers to the bone for decades to arrive at a position in life of comfortable wealth. We worked our way out of poverty to wealth, worked really hard.
Last fiscal year we paid a fifty-three percent tax rate, a combined personal income tax, capital gains tax and other taxes. More than half of our income is taken away by taxes, not including typical retail taxes. We estimate under an Obama administration, our tax liability will move up ten percent, to about a sixty-three percent tax rate. Under a McCain administration, our total tax rate will be significantly reduced.
High taxes, this annoys us. However, what really angers us is our family, including our daughter, will be carrying the weight of a majority of Americans upon our backs. Bad enough as is, but Obama will make this worse by taking away our hard earned money then giving our money to those who pay no taxes, to those who do not contribute as much to America, to those who do not work as hard as our family.
Obama will render our family a welfare agency, in fact. This is his plan.
Our family response, should Obama be elected, will be to cash out much of our stock market investments, cash out our real estate investments, cash out almost all our investment holdings. We will do this to lower and hopefully eliminate our tax exposure. Millions of other families, I am sure, will do the same. We will withdraw our family money from America.
Obama will prompt many to take actions which will lead to economic disaster for America.
Our family is extremely angry about this prospect of carrying the weight of Americans upon our backs which includes, most likely, you readers.
Our family was born to poverty. We worked our way out of poverty, on our own with no help from any nor our government. None of us have ever collected unemployment benefits, never have received food stamps nor received welfare. We have pride. We work hard. We carry our own weight as all people should.
Where is your pride? Why should our family have to carry your weight upon our backs?
Okpulot Taha
Choctaw Nation
This guy would disagree with
This guy would disagree with you:
http://www.salon.com/opinion/kamiya/2008/10/21/taxes/index.html
Working people don't just
Working people don't just pay income taxes. They also pay payroll taxes (about 15%/year taken out of their paychecks). Obama's proposal would ease that burden. The "40% of people don't pay income taxes" line is a total red herring.
It is important to realize
It is important to realize the differences between the McCain and Obama tax plans, and how they would affect our current economic woes. Although you have examined some of the redistributive effects of the Obama plan, you have not looked at how it will stimulate the economy. Those with less than 0 tax liability well spend the money they receive quickly. They have less income and are struggling to pay the bills. When they get their check from the government, they will immediately inject this money back into the economy by spending it and consumerism accounts for an enormous part of our GDP.
Compare this with the McCain plan that will give much larger tax breaks to much richer people. These are the individuals who are not struggling to pay the bills but live a comfortable life. Seeing the volatility in the market, these people are much more likely to save the money that they get from a McCain administration. If this money is saved it, in essence, "leaks out" of the economy for the time being.
So we have two options when it comes to tax policy. An Obama tax cut to lower and middle class individuals who will immediately spend their money and help boost the economy out of this mess. Or, we can have a McCain tax cut to the upper class where their money will be saved. The money will not help the economy and the tax cut will further deepen our deficit.
What is not an option is using scare tactics such has screaming socialism or "spread the wealth around" without looking at the tax plans' effects on the macroeconomy.