Lack of Understanding?
In today’s Wall Street Journal, William McGurn does an excellent job describing why it is impossible for Obama (or anyone else) to give an income tax cut to 95 percent of Americans. Why? Because approximately 40 percent of Americans don’t pay income taxes.
McGurn writes:
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.
McGurn does a very nice job of debunking the notion that, as Obama’s camp suggests, the tax credit won’t really be a payroll tax cut. Still, McGurn misses a larger point called the Earned Income Tax Credit (EITC).
Many low income families qualify for the EITC, which was originally designed to offset some of their payroll taxes. Naturally, the EITC has been expanded through the years. For at least the last seven years, EITC payments more than offset low-income workers’ payroll taxes.
The exact amount of the credit depends on martial status, the amount of income earned, and the number of children in the family.
Here’s an example (using numbers from a couple of years ago):
Single with no children, earning $15,400
- .0765 payroll tax = 1,178; EITC = $2,747
- Federal income tax = $613
- Net Credit: $956
Married with one child, earning $16,849 in wages
- .0765 payroll tax = 1,289; EITC = $2,747
- Federal income tax = $0 (may even get an additional “refundâ€)
- Net Credit: $2,747 (at least)
Granted, someone in either of these two situations probably is not having an easy time of things, but that is not the point. The point is simply that our tax system already has the type of credits Obama’s plan is calling for and then some. All the more frightening that Obama is quoted as saying: “We’re not going to solve Social Security and Medicare unless we understand the rest of our tax policies.”
NM
October 22nd, 2008 at 10:52 am
Fair enough, but the total cost to the federal government of both the EITC and the Child Tax Credit is about $45 billion, or 1.5% of the $2.9 trillion federal budget. Hardly a jaw dropping amount of money and hardly worth the attention its getting on the campaign trail.
October 22nd, 2008 at 12:23 pm
Fair enough. And, by this logic, corporate tax revenues are only about 2.5 percent of GDP….so let’s just get rid of them.
July 14th, 2010 at 1:49 pm
This post is great.