Individuals
Probably the most appealing aspect of Barack Obama’s tax plan is how it affects individual voters. The Obama campaign has done an amazing job communicating the simplicity of how Barack Obama plans to tax Americans.
You hear everyone from the Obama campaign chanting the same mantra: An Obama administration will only raise taxes on people making over $250,000 per year. Everyone else will be unaffected.
The “middle class” of America makes up the income groups of $50,000 per year to $149,999 per year. This makes up about 41.7% of households in America. The magic number of $250,000 was specifically selected by the Obama campaign (no doubt through rigorous polling and testing) because to the lower-class and middle-class American, those who make $100,000 more than the top tier of the upper-middle class hits a powerful psychological trigger.
To the lower and middle class, who tend to top out at $150,000 per year in high paying jobs - those who hit the magical number of $250,000 and more are automatically perceived as “rich.” And it is this psychology that Obama is, quite effectively, targeting with his tax strategy.
To the average taxpayer - especially the middle class, who will rarely see those types of earnings from their jobs - this system seems simple and fair. After all, the rich can afford to pay more taxes, can they not?
And the Obama campaign does not try and complicate the explanation with details. They make it understandable: The rich pay more taxes, the rest don’t. That is something the average American can understand and agree to.
Under an Obama Presidency, the people in the top two tax brackets will see their taxes increase to 36% and 39.6%. It’s these people who make over $250,000 per year, and will see up to 40% of their paychecks going to the government.
Obama also wants to sweeten the deal by offering tax breaks for low and middle-income taxpayers, including a tax credit of up to $500 for individuals and $1,000 for married couples. He would expand the earned income tax credit, a tax break that benefits the working poor. And seniors with income of $50,000 or less would pay no federal income tax.
On the surface, this seems like a good deal. But if you dig further, you’ll see the flaws in Barack Obama’s plan.
We’ve already established that there is a growing percentage of zero-liability tax filers, who pay no income tax. This is primarily the low-income crowd (which is also made up of seniors already), who get the most tax credits. By offering more tax credits to this crowd, Obama is essentially allowing people to take money from the government at the expense of the people who DO pay taxes.
His policy will also INCREASE the size of the zero-liability tax crowd because of the people who will take advantage of the added tax credits.
The logic here is that this is okay, because the rich are paying higher taxes. So the low-income voters like this because they are essentially RECEIVING money from the government, while a small section of the lower-middle class now gets to pay no taxes at all as well.
What these beneficiaries of the Obama tax plan don’t realize, is that you will see the rich begin to shift their wealth OUTSIDE of the United States in an effort to keep more of their money. This means offshore banking and creative accounting, as we explain in our article How The Rich Hide Their Wealth.
This means the government is actually getting less money from the rich, and the majority of the tax burden falls on the shoulders of the middle class and small businesses who don’t know how to protect their assets.
Finally, when you shrink the government’s revenue by raising the percentage of zero-tax filers and escaping wealth, and you add in an increase in spending on social programs like nationalized health care, you will see the United States begin to get buried under an ever increasing amount of debt.
This means more money will have to be created, which means more inflation, which means the value of the dollar will drop, and everyone suffers. To understand this further, you’ll want to read our article on the funding of social programs.
Unless Congress acts, the tax cuts enacted by President Bush in 2001 and 2003 will expire at the end of 2010. Though Barack Obama has stated he wants to make the Bush tax cuts permanent for the bottom four tax brackets, (and keep in mind those bottom two brackets don’t tend to pay income taxes at all) chances are he will be forced to raise taxes on the middle class if he wishes to continue to fund his aggressive social initiatives.
And should he wish to try and keep from raising taxes on the middle class, he will be forced to create more money from the Federal Reserve Bank, which could lead to an economic disaster of epic proportions.
In looking at both McCain and Obama’s tax policies, the two tax plans share the unfortunate attribute of adding to tax complexity - despite Obama’s successful attempts at making it sound simple. In other respects, the McCain proposal significantly advances good tax policy by emphasizing lower rates while the Obama plan raises tax rates.
The Obama plan also suffers in its proliferation and expansion of refundable tax credits, further (and inappropriately) using the income tax system as an income support system. You can learn more about this in our article on wealth redistribution.
Comparing the McCain and Obama tax proposals reveals important similarities and distinctions. For example, among the similarities:
- Lower Taxes. Both sets of proposals, on balance, reduce federal taxes, demonstrating a clear and encouraging understanding by both candidates that federal income taxes are too high. McCain proposes $300 million more in tax cuts over 10 years. Unfortunately, Obama proposes additional tax increases but delays their implementation until at least two years after the completion of a hypothetical second term.
- Mostly Validating Bush Tax Policy. Both sets of proposals recognize the fundamental soundness of the 2001 and 2003 tax cuts. While the Bush tax cuts have been criticized by liberal Democrats in Congress, Obama would make most of the income tax cuts permanent, whereas McCain would make all the income tax cuts permanent.
- Support for a Reduced Death Tax. Both sets of proposals recognize the harmful effects and unfairness of the death tax. Unfortunately, both plans retain the death tax but do so at much lower rates and with a larger exemption than existed in 2000.
Obama’s tax proposals exemplify his view that redistributing income among citizens is more important than increasing their earnings and creating jobs. This view is apparent in his proposal to raise income taxes dramatically on individuals and small businesses earning more than $250,000 and then to raise payroll taxes on these same taxpayers after 2018.
Obama’s preference for wealth redistributionism over economic growth is also apparent in his proposal to raise the capital gains and dividend tax rates. Capital formation is essential for increasing worker productivity and workers’ wages. Taxes on capital gains and dividends are directly harmful to personal wealth creation and to business investment.
While raising taxes on higher-earners, Obama also cuts taxes for those who already pay little or no federal income tax. He achieves this by increasing the child and dependent care tax credit and making it refundable. He further engages redistribution of wealth through a new, refundable make-work-pay tax credit for low-wage workers and by expanding the earned-income tax credit.
With its focus on lower tax rates, the McCain tax plan is more conducive to economic growth and increasing wages; the Obama plan’s higher tax rates and proliferation of refundable credits means the United States would forego a significant amount of possible wage growth in favor of redistributing wages and earnings.
Through the lens of sound tax policy, both McCain’s and Obama’s tax plans would leave the tax code more complicated than it is today. Even so, McCain’s plan has important advantages through its focus on keeping tax rates low - and lowering them further in some instances - while improving incentives for investment and correcting an extremely harmful tax distortion at the heart of much of the trouble in America’s health care financing system.
In contrast, the Obama plan raises income tax rates, raises payroll taxes on a delayed basis, and actively increases the use of the tax system to redistribute income to those who pay little or no income tax. Each of these aspects move the United States’ tax code in a decidedly inappropriate direction.
On balance, the McCain tax plan would be decidedly better for economic growth, largely because it would lower tax rates while the Obama plan would raise tax rates. Under the McCain tax plan, the economy would be expected to be about $320 billion greater, and the average household income about $2,600 higher than would be the case under the Obama tax plan.
But the important thing here is which candidate would limit government spending? Any tax plan that has to do with lowering taxes must be accompanied with spending discipline if it is to effectively help the economy rather than sending it even deeper into debt.
It is obvious that Barack Obama is not planning to control his spending plans, which will only further increase the size of the U.S. debt while revenue decreases under his “tax the rich” plan.