(CNSNews.com) – Democratic presidential candidate Barack Obama’s plan to cut taxes on 95 percent of taxpayers would effectively increase government spending by an average of $64.8 billion a year and effectively raise income tax rates for many Americans, even on some earning $20-$50,000 per year, according to the non-partisan Tax Policy Center.
The heart of Obama’s tax cut proposal is in his use of refundable tax credits, which the Center describes as “credits available to eligible households even if they have no income tax liability” -- in short, refunds available even to those who don’t pay taxes. These refunds are claimed on tax returns and are paid to all taxpayers who qualify for them, regardless of whether they owe taxes or not. These refunds have the ability of reducing a taxpayer’s liability below zero, meaning they can get a refund without actually paying taxes.
In real numbers, 60.7 million people who have no tax burden at all will receive refunds from Obama, while only 33.8 million people, who pay approximately 40 percent of income taxes, will get any kind of refund. Twenty percent of taxpayers, who pay 87.5 percent of total income taxes, will actually see after-tax income decline under Obama by nearly two percent, according to the Center.
By using these refunds, Obama is able to claim that he is giving a tax cut to 95 percent of households, although only 62 percent of households pay any income taxes at all. This means that Obama’s tax plan calls for giving money to some households that do not pay taxes, including a plan to make community college “essentially free” and pay 10 percent of the interest on all mortgages.
The problem with Obama’s characterization that his proposals are tax cuts is that refundable credits are calculated as outlays, or direct spending, not as reductions in tax rates, according to the Center. This means that, in budgetary terms, some of Obama’s tax cuts are actually spending increases.
The Tax Policy Center estimates that Obama’s spending proposals will be so large that they effectively eliminate income taxes for 15 million households, increasing the percentage of households that pay no taxes from 37.8 percent to 48.1 percent.
Obama’s biggest refund, and the one most likely to go to non-taxpayers, is his Making Work Pay credit, which would give $500-$1000 to everyone making under $200-250,000 a year. This proposal, which the Tax Policy Center says is “intended to offset the regressivity of payroll taxes,” would cost taxpayers $323.4 billion during Obama’s first term, if elected.
The credit would be applied to those making as little as $8,100 per year: the equivalent of working approximately 20 hours per week at $7.25 per hour, the level of the federal minimum wage during Obama’s presidency.
Obama’s second refund is his Universal 10% Mortgage Interest credit, which will automatically refund 10 percent of mortgage interest, up to $800, for taxpayers who do not itemize deductions. Currently, taxpayers who itemize deductions may deduct mortgage interest from their taxes. This new refund would amount to a $13 billion subsidy for taxpayers who do not itemize.
Obama’s third new refund is the American Opportunity credit, which will provide up to $4,000 in refunds to cover the costs of college tuition. The Obama campaign Web site says that this refund is aimed at “making community college essentially free and covering 2/3 of the cost of public 4-year college.” This refund would cost $58.2 billion during Obama’s first term, according to the Center.
Obama also plans to expand the child and dependent care credit, by making it refundable and extending it to cover up to 50 percent of the cost of child care, up to $3,000. This proposal would cost an estimated $10.6 billion during an Obama first term and would disproportionately benefit those who pay little or no taxes, according to the Center.
Obama would also make the Savers Credit refundable, expanding it to “match 50% of the first $1,000 of savings for families that earn under $75,000,” per year, according to the Obama campaign.
The Saver’s Credit is a non-refundable credit which offers low-income taxpayers up to a $1000 refund on contributions they make toward a 401(k) or IRA retirement account.
Combined with his proposals to mandate enrollment in 401(k)s and require employers who do not offer them to establish IRAs for workers would carry a Center-estimated cost of $92.3 billion during Obama’s first term.
Obama would further expand an already refundable credit, the Earned Income Tax Credit, in three ways. The Earned Income Tax Credit is a refundable credit for low-income workers designed to give refunds to people who may have dependents but do not pay income taxes.
First, Obama’s plan would extend the credit’s phase-in range for childless workers, or lower the income level required to qualify for the credit, by increasing to $6,300 the amount of income that can be used to calculate the credit.
Second, he would extend the credit’s phase-out range for childless workers, raising the income ceiling on the credit. Phase-in and phase-out ranges are the maximum and minimum income levels needed to qualify for the credit. Obama would extend the phase-out level to $9,825.
Third, he would increase the size of the refund available by increasing rates from 7.65 percent to 15.3 percent for childless workers, and from 40 percent to 45 percent for couples with more than three children. According to the Center, these expansions would cost an estimated $19.3 billion over four years.
These programs would apply to most workers making less than $200,000 a year for singles and $250,000 a year for couples, but not evenly. Most of the benefits of Obama’s plan would go to the bottom 40 percent of wage earners, a group that, according to the Congressional Budget Office and the Tax Policy Center, pays zero percent of the nation’s income taxes.
In fact, Obama’s refunds get smaller as tax burdens get larger, which means that while it is true that 95 percent of workers will receive some form of tax refund from Obama, they will not all receive a full refund, because Obama relies on phase-in and phase-out proposals to target his refunds toward the lowest-earning tax brackets.
It is these phase-out requirements that result in a general decrease of the refunds for people earning over $75,000 per year, according to the Center. This bracket includes nearly 40 percent of all Americans and nearly 20 percent of total income taxes.
When compared with current law, people earning $20,000-$50,000 a year will see their effective tax rates -- the amount of money the taxpayer actually ends up paying the government -- increase on average under Obama’s plan, according to Tax Policy Center figures.
Most households making $30,000-$75,000 will not see a reduction in their taxes under Obama’s plan relative to current law, according to the Center. In fact, the only strata that will see a majority of its effective tax burden reduced under Obama are those making less than $30,000 per year and those making $75,000-$200,000 per year.