In a prior TaxByte, we saw that Obama’s tax plan would increase marginal tax rates for just about every major federal tax. So how is it he claims to be a tax-cutter?
Obama combines these comprehensive tax increases with a slew of refundable tax credits primarily for low- and moderate-income workers, which he calls middle-class tax cuts.
“Refundable” means that if the worker doesn’t have enough tax liability to take advantage of the credit, the government sends the worker a check to cover the full amount of the credit. So if the tax credit is $1,000, but the taxpayer would otherwise only pay $200 in income taxes, the credit covers the $200 tax bill and the government sends the taxpayer a check for the remaining $800.
If the taxpayer pays nothing in federal income taxes, the government would send him a check for the whole $1,000.
Under Obama’s tax plan, these refundable tax credits are targeted to those who pay little or nothing in federal income taxes. The latest CBO data shows the bottom 40 percent of income earners already pay no federal income taxes. Indeed, they receive a net payment from the federal income tax system (i.e., taxpayers) equal to 3.8 percent of all federal income taxes, because of already-existing refundable tax credits.
Such “tax credits” are really government spending programs. Call it the New Tax Welfare. Obama’s refundable tax credits would involve government checks for child care, education, housing, retirement, health care, welfare and just outright giveaways.
When Obama says he will cut taxes for 95 percent of Americans, he is talking about his proposal for a $500 refundable income tax credit for all but the top 5 percent of income earners. For the bottom 40 percent, and more, this will be another check from the federal government, not a reduction in tax liability. Another increase in government spending rather than a tax cut.
The Obama tax plan is the opposite of tax reform, which involves lowering tax rates and closing loopholes. This plan doesn’t cut taxes, it increases welfare.