Obama’s Tax Plan Too Tricky for Its Own Good
By Alan Stewart Carl | Related entries in 2008 Election, Barack, TaxesWilliam McGurn of the Wall Street Journal explains the accounting shell game of the Barack Obama tax plan. Here’s how it will work:
Under Obama’s tax plan, 44% of Americans will owe no income taxes but many will get a “tax cut†anyway. Meaning they’ll get more back from the IRS than they put in.
But Obama’s campaign says this is not wealth redistribution because they are actually giving these people back a portion of their payroll taxes (i.e. Social Security). O.k. But wouldn’t that defund Social Security? No, Obama says, because the money won’t come out of Social Security. It will come out of “general revenues.†And where do those general revenues come from? Other Americans who are not so fortunate as to be on the receiving end of Obama’s largesse.
Catch all that?
What irritates me is not so much the redistribution of wealth. I think that’s an ultimately self-defeating principle, but I understand that the economic impact of such a plan is debatable and that a lot of people believe such direct movement of funds from the rich to the not-so-rich is a morally preferable way to manage a society. I’d rather we invest in programs that create opportunity instead of just shuffling money around, but if I’m on the losing end of that debate, so be it.
What irritates me is the chicanery in the way Obama has structured his plan, as if to hide the true nature of his proposal. If he wants to directly transfer money from one group to another (rather than investing that money in services or programs), he should just say so. He’s being deceptive to claim he’s actually refunding Social Security taxes while taking the funds out of general revenues.
I know politicians finagle language and obfuscate intentions all the time. But I never like it. And I wish Obama wasn’t doing it with his tax plan. I’m not saying he’ll lose my vote over it, but he sure isn’t doing much to win it either.
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October 21st, 2008 at 7:36 am
carl come on. You are toosmart and toosavvy to fall for the “spreading the wealth around” meme bs. That’s the nature of our regressive tax system – unless we switch to a wealth (net) flat tax.
October 21st, 2008 at 8:17 am
The truth is, under McCain’s plan, that same 43-44 percent of Americans will also pay no taxes. McCain accomplishes this magic with a refundable health care credit, which cuts taxes for many Americans and dramatically realigns health care–whether that’s good or bad or will be successful is another topic. Obama uses a longer list of smaller tax credits to achieve the same result.
The redistribution of wealth pissing and moaning is a joke–the last 30 years have been all about shifting wealth from the poor and middle class to the rich.
Where was the complaining then? And the first person who says the “rich” earned it haven’t been paying attention for the past two months. And just to kick the middle class in the teeth one more time, rather than allowing the “free market” to decide and punish those who made bad decisions, George Bush and his cronies reached into our pockets one last time out the door and gave $700 billion plus with no strings attached. That’s called privatizing profit and socializing loss.
It’s a good thing for the wealthy the vast majority of this country is asleep because 200 years ago they would have been tarred and feathered and driven out of town on a rail.
October 21st, 2008 at 8:26 am
Alan I strongly agree with you that proposals such as this are objectionable mostly due to their stealthy nature. I always get irritated when politicians try to blur the lines on basic ideas. If Obama is offering low income folks a tax cut on their social security taxes, he ought to be upfront about that. And he ought to be upfront about where he plans to make up the resulting shortfall, especially given that SS is already headed into serious deficit territory.
I have been undecided for some time, liking both Obama and McCain much more than any other Presidential choices I’ve been offered in the past. After the convention I was leaning slightly towards McCain for various reasons. Until I took my measure of Palin and found her to be sadly lacking as the VP choice given a 72 year old ticket topper. I cannot support the GOP ticket with Palin on it. And I say that as someone who many of you know defended the notion of giving her a chance.
So I expect to support Obama’s election. And then I expect to join the opposition when it comes to the anticipated gross excesses of some of Obama’s programs. I believe that Obama is full of crap on taxes, and that circumstances will force him to back away from many of his promises. If he does not, that will signal the end to any honeymoon he expects me to grant him.
Here’s the thing about taxes, though. A big part of the concept of taxation is fundamentally income redistribution. That’s a starting point realization, and it doesn’t really bother me that much. That a democracy would use taxation to even out some of the high and low spots really shouldn’t be either surprising or objectionable to most Americans, at least not as an idea.
Unless of course you are upfront about preferring a different form of government. Any government with a passing resemblance to a democracy is going to do some of this leveling out, because there are more folks with less, and less folks with more.
It’s an equation:
So if you accept democracy, then the discussion moves to when and how much seems to make sense, or is at least defensible to at least 50% + 1 voters. It’s up to all of us to decide how to strike this balance. I believe that it’s a poor way to frame the issue to suggest that we must choose between leveling out and fostering economic opportunity. Instead, I think moderates and independents must face the fact that it’s always going to be a difficult job of figuring out how best to strike a balance.
Further, we can’t really look to ideology or data to give us an unchanging answer about where this balance lies, and then establish it for all eternity.The balance is sensitively dependent upon many variables and is therefore everchanging. Inevitably, we’ll go too far one way, and eventually we’ll overcorrect and go a bit too far the other way. Of course, partisans of either stripe will always feel that we never went far enough towards their promised land. F*ck ‘em, I say.
October 21st, 2008 at 8:40 am
We have every right and obligation to make adjustments when too many people are getting hurt. Virtually every country on Earth has a progressive income tax system.
There is no reason to totally let the market decide. People claim that this is the only even-handed and natural way to decide things. Disease is natural, and we treat that. Right now, we know that our system is hurting the poor while rewarding the rich. It needs adjustments:
http://www.bloomberg.com/apps/news?pid=20601082&sid=aU8sw2lvhK3w&refer=canada
Anyway, there is nothing natural about the free market. Property, and the legal protection of property, are human creations. If free market advocates really wanted the most “natural” system, then they would abolish property and return us to the rule of the jungle. We made this system. We can adjust it.
There is no reason that we need to allow brokers to make $70 trillion dollars of credit default swap trades without government oversight, and there is no reason that we need continue Bush’s tax cuts for the rich when so many other people need that money.
October 21st, 2008 at 8:53 am
I’d take stealth over outright lies any day.
October 21st, 2008 at 9:00 am
erik … I don’t think I’m falling for anything. As I said, in principle, I prefer taxes go to programs and services rather than move directly from one person’s pocket to another person’s pocket. I don’t mind helping people out through taxes — but I do mind the process in which we do that and I mind how those plans are presented.
gerry: fair points, but the McCain healthcare credit is funded differently by taxing people on their employer provided benefits (that exceed $2,500 per individual per year) and by making some magical fantasyland cuts in medicare and medicaid that won’t also cut benefits. Plus, since the money is targeted for healthcare, it’s not just taking money from one person and giving it to another.
October 21st, 2008 at 9:01 am
Also, we can’t just “provide more opportunites” for people to move up the economic ladder. About 11 or 12% of people are poor becuase they are unemployed or underemployed. About the same amount are working poor people. When income is distributed so unevenly by the market and when not everyone can be employed, progressive tax systems are needed to make up the difference.
We can’t all be business owners.
October 21st, 2008 at 9:27 am
Jeff … but how will giving them a few hundred or even a few thousand extra dollars a year really help them long term? Obama is not proposing major relief here. It’s all pretty minor.
If we really want people to be able to better themselves, we have to increase opportunity. Giving them cash doesn’t do that. Giving them student loans (or grants), childcare, retraining, etc. will allow those people a better chance of getting out of their situation. Income inequality cannot be remedied by shuffling cash from one group to another — not in any meaningful way. We have to consider other means of helping the less fortunate. Obama sees the 21st century problems, but he’s using too many 20th century tools.
October 21st, 2008 at 10:12 am
I actually think that giving people the money is a good thing, and not just because for redistribution of wealth but from an economic point of view it makes sense,, why, because, as Keynes pointed out recessions come from a weakness in Aggregate demand, by putting more money into the hands of those most likley to spend it, the lower and middle class, as they need certain things immediately, and can’t afford to save as much, you will be driving up demand.
October 21st, 2008 at 10:48 am
Alan’s right, the help is a drop in the bucket.
And I agree with Alan’s other point as well. It’s bascially the policy manifestation of
If we give money directly back to the poor at the expense of social security funding, we exacerbate the SS problems and we create a new subsidy. If we give extra money to “underemployed” folks making $9.50 an hour, where’s the motivation and the training resources for them to become qualified for a $15/hour job.
Avinash, do you really think that the economy wiull be encouraged by putting more spending power in the hand of people most likely to purchase commodities and other essentials? I don’t say the following simply for the sake of being glib, but we won’t turn around the economy on the strength of increased purchases of kraft macaroni and cheese and gasoline, and more rent paid on time. This is not to say such things would not constitute a relief to the folks benefitting from it. But no one who has studied such matters seriously thinks the economy would be spurred by such actions.
In other words, make the moral argument and you don’t get much quarrel from me. But the economic argument doesn’t hold water.
October 21st, 2008 at 11:06 am
ASC,
College tuition credits and child care credits are part of Obama’s tax plan.
October 21st, 2008 at 11:28 am
Jeff — yeah, I know. I do think his intentions are in the right place. I’m just not convinced tax credits are the right means.
Avinash: you know who benefits most from putting more money into the pockets of poorer Americans? Wal-Mart. And Wal-Mart is not exactly creating a lot of good jobs. So, while your plan would improve people’s lives to a small degree, the money would not necessarily end up stimulating the economy in the kind of ways that lead to greater wealth for more people. I don’t have a solution, but I think we need a more robust and creative approach than just shuffling money around. When I allow myself to drop the skepticism, I find myself thinking that Obama has the kind of keen inteligence and right intentions to lead us along a much wider path than he’s laid out in his tax plan. If I vote for him, that will be why. Potential.
October 21st, 2008 at 11:54 am
Keynesian economics stipulates more along the lines of what Bernanke recently talked about in the Financial Times, infrastructure improvements etc. I am suspicious that, similar to the stimulus checks mailed out last tax period, these will have any real effect. I also don’t think they will have a negative effect on the economy. Alan, you ask for a more robust and creative approach, are you talking just in terms of tax policy or general economic policy? If economic policy, more creative like investments in renewables, research and development, infrastructure improvements?
Maybe it is a political ploy, think Clinton in ‘93.
October 21st, 2008 at 2:46 pm
L, I’m talking economic policy. I think we mess with taxes too much as it is in an attempt to create certain desired outcomes.
I wish I had a great plan. Now, something like infrastructure investment is a very strong stimulus idea that I think could get bipartisan support. For one, we need to invest in our infrastructure before it gets to the point of collapse and costs a heck of a lot more. But what makes it great stimulus is that construction can’t be outsourced to China. The jobs are created here and stay here. Yeah, the awarding of contracts could open up opportunities for corruption, but I think the net effect would be very positive.
However, that’s stimulus and not permanent. In the long-term, we have to find a way past the situation where a signficant part of our populace stuck in low-wage service jobs with no hope of advancement. I don’t think it’s sustainable to subsidize these workers with government funds because it would create an entrenched service class. This is not as easy objective. But I wish I knew of more people developing creative approaches. I’m sure there are more ideas than I’m aware of.
October 21st, 2008 at 5:18 pm
Alan,
You are talking about the structure of our economy not the business cycle when you talk about low-wage service jobs. It looks like you give away your liberal leanings, because while even conservatives might be open to government intervention in the business cycle (i.e. a stimulus) tampering with the market is not something they are comfortable with.
There is nothing we can do about low-wage service jobs, there is obviously a high demand for them and the supply is even larger than the demand, it is likely only the minimum wage keeps the wages where it is. I would also hesitate to place low-wage service jobs lower than other jobs, like low-wage manufacturing, low-wage agricultural or construction jobs. I would like to see a US economy based more around small business than large box corporations, but that is a value judgment and involves serious government intervention (the type France has done to maintain its city culture).
I guess what I wanted to say before was that the stimulus is a way to make the American economy better, not low-wage service workers lives better. Is that not how you view it?
October 21st, 2008 at 7:19 pm
L, I’m not suggesting tampering with the market. There’s nothing the government can reasonably do to increase low wages to a “living” level. It’s a supply and demand problem that is going to persist.
I want the government to create more oppportunity through schooling, childcare, etc. that will give people a real chance to pull themselves up. Some people won’t take advantage, but that’d be their choice and not because they’re trapped (which is a problem currently). Creating opportunity is a lot different than the government fiddling with markets.
As for stimulus, I’d prefer the government invest in things like infrastructure which has real, measurable results rather than just handing out money, which has proven only to give the economy a one-time, short-lasting juice.
And, as for small business vs. big box. I shop local when I can but other than zoning restrictions to preserve historic areas, I’m not in favor of outlawing the Wal-Marts. Their cheap products help poorer people stretch their dollar. And while you could argue that more small businesses would mean better jobs and thus fewer people needing to stretch their dollar — that’s the kind of market engineering project I’m against. Too many risks for unproven rewards.
October 21st, 2008 at 9:03 pm
ALAN STEWART CARL COMMENTARY: Obama’s Tax Plan Too…
Asserts the moderate blogger: “William McGurn of the Wall Street Journal explains the accounting shell game of the Barack Obama tax plan. Here?s how it will work: Under Obama?s tax plan, 44% of Americans will owe no income taxes but many will get a …
October 21st, 2008 at 10:29 pm
Sorry Kritter. Too late. For the next two years (at least) there will be no practical opposition. Full stop. None. Simple fact.
It is silly to think that this will be considered anything but a mandate and a blank check with no balance and no oversight. Whatever Barack wants, Barack gets. Whatever Pelolsi wants Pelosi gets. Whatever Reid wants, Reid gets. Whatever Rangel wants, Rangel gets. Whatever Schumer wants Schumer gets. Whatever Clinton … well … Hillary is going to have to ask nicely and say pretty please.
This is the way it works: Anyone who helped Barack goes to the front of the line and gets their cut. It is the Chicago way.
You have to be delusional to believe that (with 100 a vote majority in the House and a filibuster proof Senate) anyone in the Obama administration will care about any voices of moderation or opposition.
You will reap what you have sown.
Enjoy.
October 21st, 2008 at 10:49 pm
@Alan
You are being way too kind with your language here Alan. To say that writing government checks to people who are not paying taxes is a “tax credit” is Orwellian doublespeak of the first order. Want to hide a bad policy? Just change its name. Alan, here at Donklephant, Justin insists that we call this what it is – a bald faced lie.
Well, at least it is good to know what David Axelrod’s role will be in the new administration. He will be running the The Ministry of Truth -
“War is Peace,”
“Freedom is Slavery,”
“Ignorance is Strength.”
“Handouts are Tax Credits”
October 22nd, 2008 at 12:27 am
Alan,
So presumably you are in favor of Obama’s work-training program and research and development in terms of both providing better opportunities for people and a lasting stimulus to the economy? I am trying to figure out what, besides being opposed to tax credits, you want from Obama that he hasn’t already put on the table. It sounds like he addresses many of your concerns.
Also, a one-time short-lasting jolt is sometimes all that is necessary to spark the end to a recession. In its most basic, Keynesian definition a recession is when people start holding money and stop spending. Once you get people spending again, wa-la. I’m not in favor of using legal codes to influence the size or shape of our businesses either, I was just pointing out one method other nations have used to prevent large swaths of low-wage service workers.
See how this one sits with you. In a service-based economy like ours, where services account for approximately 80% of our economy, there will always be low-wage service workers. So if you want to improve their lives, with real, lasting effects, but realize that you can’t immediately change the structure of our economy, you can provide health-care, high minimum wages, bigger unemployment compensation or some combination of these or others. Wealth redistribution? Yes, but still welfare maximizing (welfare as defined by economics, not handouts). It also is going to be the only foreseeable way of seriously changing the lives of millions of low-wage service workers.
October 22nd, 2008 at 7:27 am
L, there are aspects of Obama’s grab-bag of plans that I like. But since he has focused so intently on his “tax cut,” I have to assume that is his priority and the main way he will seek to influence the economy. I don’t sense his philosophy is one of opportunity creation but one of government paternalism. Of course, he could evolve once in office. He seems like a man who’s open to new ideas.
As for subsidizing low-wage workers with various programs, I still worry about creating an entrenched class. Not that I think we should just leave such people to dangle in the wind, just that, if you’re not careful, people come to rely so much on the government that they lose the motivations they need to be more productive. This isn’t just a theory. Many European nations have a problem social mobility. For all our problems, we still have the most social mobility in the West. Particularly amongst our immigrants.
Ultimately, I don’t think there is a “pure” answer. Nor does one political philosophy have a substantially better grasp of the situation than another. It really is the kind of issue that will take the best minds to address.
October 24th, 2008 at 10:05 am
Giving people LOANS will never, ever help them in any real way. First off, they have to pay back the loans at high interest rates for the rest of their lives. I know some College Graduates who will indeed be paying for their education FOREVER.
People are ALREADY encouraged to not better themselves in any way – People on Welfare who depend on that money can’t make x amount or they loose it. People receiving Social Security can’t earn much money or they loose it. Obama’s plan is encouraging people to work harder by making so that they get to get back a lot more of what they put in.
I don’t get multi-million dollar bonuses for failing. What kind of problem do you have with me getting $500.00 (tax break) just for keeping my job? I will probably still be paying taxes, just not as much. For people who make less than me and don’t owe taxes in the first place, $500 is a LOT of money. Trust me, I was there for a long time, never earning enough to owe taxes. It may be the difference between being stranded and being able to get to and from a job.
October 24th, 2008 at 10:51 am
Obama’s tax plan will destroy the Social Security system.
Obama says his income tax plan will lower taxes for 95% of Americans. There is just one problem with this, 40% of Americans already pay no income tax. Obama’s response to this is that these people pay Social Security tax. Well, that’s not income tax, but a contribution to their retirement plan. So if he wins and implements his tax plan, for the first time in the history of Social Security, 40% of the people who will get retirement benefits will have paid nothing for them. Social Security will then loose all pretext of being a retirement plan, and will become a national welfare program.
This will cause Social Security to lose public support in a massive way. Leave Social Security contributions out of income tax plans. If you take some peoples income taxes to pay others Social Security taxes, Social Security will be destroyed forever.
http://strategicthought-charles77.blogspot.com/2008/10/obamas-tax-plan-will-destroy-social.html
November 10th, 2008 at 1:13 pm
Following an historic election, let’s take a moment to examine just what an Obama presidency will mean to the United States – what we have to look forward to, and how he will deal with our current economic issues. According Jim Davidson, some of the numbers just don’t add up:
“One of Obama’s specific proposals is to raise the capital gains and dividend taxes to 25%, which will sharply increase capital confiscation as increasing percentages of “gains†will reflect inflationary depreciation of the currency. In the U.S., an investor must pay tax on the difference between the sales price of an asset and it purchase price, with no adjustment for inflation. Consequently, when the tax rate and inflation are high, a large portion of the “capital gain†is illusory. Any asset that appreciates by less than the rate of inflation will result in its owner losing purchasing power and having to pay taxes on the illusory gains. At Obama’s higher tax rates, (he has suggested that capital gains and dividend taxes should be hiked to as much as 25%,) capital confiscation would result from modest levels of inflation.
And the Great Credit Crunch implies that inflation will be far higher than in recent experience.
Setting aside whether it is moral or equitable to force a small fraction of the population to essentially pay for the whole cost of government, much of which entails the shuffling of checks to purchase votes of various aggrieved groups, there is a bigger question. Can it be wise for the whole fiscal regime to stand on the shoulders of a small group, like a pyramid tottering on its point, so that any tribulation which undermines the prosperity of those who pay would promise to bankrupt the state?”
The Danger Lurking Behind Obama’s Tax Policy