October 22, 2008

The Tax Cut Fallacy

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One 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.[img_assist|nid=32868|title=A graph depicting how effective marginal tax rates will be impacted as a result of each candidates’ tax policies.|desc=(Tax Policy Center)|link=node|align=left|width=|height=0]

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.