Obama's Tax Hike

Obama's Tax Hike

By INVESTOR'S BUSINESS DAILY | Posted Friday, August 22, 2008 4:20 PM PT

Election '08: As Barack Obama tries to convince the American people he will cut their taxes, he actually plans to undo the Bush tax cuts — and the Reagan low tax legacy.

When Bill Clinton ran for president in 1992, the centerpiece of his much-touted economic plan was a middle-class tax cut. Once elected, he announced that the deficit was bigger than he thought, so no tax cuts.

This year, Barack Obama also promises cuts in middle-class taxes. The current New York Times magazine contends that "for most people, Obama is the tax cutter in this campaign."

Writing in the Wall Street Journal earlier this month, Obama economic advisers Jason Furman and Austan Goolsbee promised: "The Obama plan would cut taxes for 95% of workers and their families with a tax cut of $500 for workers or $1,000 for working couples" on top of "tax cuts for low- and middle-income seniors, homeowners, the uninsured, and families sending a child to college or looking to save and accumulate wealth."

But what's touted as tax-cutting (even assuming his plan didn't undergo a Clintonesque transformation) hides tax increases for the middle class. According to the American Enterprise Institute's Alex Brill and Alan Viard, "Senator Obama's proposed 'tax cuts for the middle class' are actually marginal rate hikes in disguise."

The reason: Obama's plan rescinds tax breaks as some taxpayers' incomes rise, reducing their incentives to earn more.

Using data from the Brookings Institution's and Urban Institute's joint Tax Policy Center, Brill and Viard considered the Obama plan's effect on a two-earner couple with one child in college and another age 12 or younger. Their marginal tax rates are between 34% and 39% in the $31,000 to $45,000 income range — a 13 percentage point or more increase from current rates.

The increase happens because Obama phases out the child and dependent-care credit for one-child families in the $30,000-to-$58,000 income range. According to Brill and Viard, the effective tax rate increases by 3 percentage points, while making certain credits refundable triggers a tax penalty of up to 15%.

The same family earning $110,000 to $120,000 would suffer "a staggering 45% effective marginal rate . . . 11 percentage points higher than under current law," the AEI scholars say, because of changes planned for Bill Clinton's Hope Scholarship Tax Credit.

An "Economists for Obama" Web site calls the AEI findings "deeply dishonest" because their example of a family is "cherry-picked." Viard immediately responded, noting that Obama's use of refundability and phase-outs means that "any example will show these kinds of disincentive effects."

Undoing the Bush tax cuts, raising income tax rates, adding complexity to the tax code and believing that you can raise taxes on the richest Americans by an average of $800,000 a year, as Obama plans, with minimal negative economic effect — it all adds up to reversing an important part of the Reagan Revolution.




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