Wednesday, October 22, 2008

WILL OBAMA'S "SLICK" TAX "CUT" OFFSET THE NYS "TOBACCO TAX?"

This guy is nothing, if not "slick." It sounds good, the way he explains it. The income tax "cuts" that go to people who don't pay any income tax actually "offset" other taxes they pay, like the FICA payroll tax, sales tax, or state income taxes. Why doesn't he go all the way, and call it a federal wage increase? There are many holes in the logic of this "tax plan," but I'd like to start with the thought that this "tax check" is meant to offset FICA, better known as "Social Security" tax. William McGurn takes this idea on, in his WSJ column today.



In most parts of America, getting money back on taxes you haven't paid
sounds a lot like welfare. Ah, say the Obama people, you forget: Even those who pay no income taxes pay payroll taxes for Social Security. Under the Obama plan, they say, these Americans would get an income tax credit up to $500 based on what they are paying into Social Security.

Just two little questions: If people are going to get a tax refund based on
what they pay into Social Security, then we're not really talking about income tax relief, are we? And if what we're really talking about is payroll tax relief, doesn't that mean billions of dollars in lost revenue for a Social Security trust fund that is already badly underfinanced?

Austan Goolsbee, the University of Chicago economic professor who serves as one of Sen. Obama's top advisers, discussed these issues during a recent appearance on Fox News. There he stated that the answer to the first question is that these Americans are getting an income tax rebate. And the answer to the second is that the money would not actually come out of Social Security.

"You can't just cut the payroll tax because that's what funds Social
Security," Mr. Goolsbee told Fox's Shepard Smith. "So if you tried to do that, you would undermine the Social Security Trust Fund."

Now, if you have been following this so far, you have learned that people
who pay no income tax will get an income tax refund. You have also learned that this check will represent relief for the payroll taxes these people do pay. And you have been assured that this rebate check won't actually come out of payroll taxes, lest we harm Social Security.

You have to admire the audacity. With one touch of the Obama magic, what otherwise would be described as taking money from Peter to pay Paul is now transformed into Paul's tax relief. Where a tax cut for payroll taxes paid will not in fact come from payroll taxes. And where all these plans come together under the rhetorical umbrella of "Making Work Pay."

Not everyone is persuaded. Andrew Biggs is a scholar at the American
Enterprise Institute and a former Social Security Administration official who has written a great deal about Mr. Obama's plans on his blog (
AndrewGBiggs.blogspot.com). He notes that to understand the unintended consequences, it helps to remember that
while people at the bottom pay a higher percentage of their income in payroll taxes, they are accruing benefits in excess of what they pay in.

"It's interesting that Mr. Obama calls his plan 'Making Work Pay,'" says
Mr. Biggs, "because the incentives are just the opposite. By expanding benefits for people whose benefits exceed their taxes, you're increasing their disincentive for work. And you're doing the same at the top of the income scale, where you are raising their taxes so you can distribute the revenue to others."

Even more interesting is what Mr. Obama's "tax cuts" do to Social Security financing. As Mr. Biggs notes, had Mr. Obama proposed to pay for payroll tax relief out of, well, payroll taxes, his plan would never have a chance in Congress. Most members would look at a plan that defunded a trust fund that seniors are counting on for their retirement as political suicide.



It's interesting to note that the government spends excess Social Security revenue in the "general fund." Isn't it a little misleading to propose using general fund revenue to pay people that are still paying taxes into the Social Security system? If Obama wants to propose "payroll" tax cuts for lower-wage workers, he should just propose that. Of course, that's "political suicide," so he did a "slick" thing. He proposed a convoluted plan that sounds "fair" to most "middle class working people," and moreso to lower end wage-earners, who stand to benefit from it. Liberals of all incomes like it because it is textbook "income redistribution."

As far as reimbursing people for state taxes, property taxes, or sales taxes, those are even thinner smoke screens. Why didn't he pitch it as a "tobacco tax rebate," for all of us NYers paying $9 a pack? Besides being "political suicide," it's not a relevant reason for this plan. Neither are any of these other taxes he says this payment is meant to "offset." Let the federal government stick to relieving the taxes they actually levy, instead of reimbursing us for "local" taxes.

He flat-out couldn't call it a "payroll" tax cut, but that's what he's selling it as. McCain needs to address this, in a way that exposes the whole "ponzi scheme" behind Social Security: spending it's dwindling surplus in the "general revenue" stream is "wasteful," to be generous. Giving it directly to people who are still working, and paying into the system is going to tick some retirees off.

If Obama can claim that this rebate "offsets" every other tax under the sun, all taxpayers should share in this benefit. Retirees, and Social Security recipients pay sales tax, and often other taxes, but get no benefit from Obama's income tax cut. How fair is this to them? Plus, his proposed "tax cut" comes nowhere near reimbursing all of the government's other levies, so it's dishonest to suggest it addresses them all.

He's selling a dream, folks, and many people are buying it. "Slick" doesn't begin to describe this guy.

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