October 17, 2008
Updated: October 20, 2008
McCain calls Obama's refundable tax credits "welfare," but calls his own "reform."
The McCain campaign has taken to denigrating some of Obama's tax proposals as "welfare" rather than tax cuts. And it continues to mislead about who would see a tax increase.
- A new McCain-Palin Web ad characterizes Obama's proposed refundable tax credits as "welfare." But McCain himself proposes refundable tax credits, too, as part of his health care plan, and calls them "reform."
- The ad also says "hard-working families" and "seniors" would pay higher taxes. But – need we say this again? – that would be true only for the affluent few, not for the many.
The "welfare" argument appears, among other places, in the McCain-Palin campaign Web ad released Oct. 16.
McCain-Palin 2008 Web Ad: "Joe the Plumber"
McCain: I'm John McCain and I approved this message.
Announcer: Americans are catching on ...
Joe Wurzelbacher: Your new tax plan is going to tax me more.
Obama: It's not that I want to punish your success. ... I think when you spread the wealth around, it's good for everybody.
Announcer: Everybody? Leading papers call Obama's taxes "welfare" ... "government handouts." Obama raises taxes on seniors, hard-working families to give "welfare" to those who pay none. Just as you suspected, Obama's not truthful on taxes.
The ad says, "Leading papers call Obama's taxes 'welfare' ... 'government handouts'." It says he would "raise taxes on seniors" and "hard-working families" and "give 'welfare' to those who pay none." It concludes, "Obama's not truthful on taxes."
This ad, however, is short of truthful itself.
As we've said any number of times, what Obama proposes would not raise taxes on any "hard-working families" unless they make more than $250,000 a year, a very small fraction of families. Independent analysis has shown than 95 percent of families with children would see federal income taxes go down.
As for "seniors," most of them would not see any increase in their federal income taxes either. In fact, Obama proposes to reduce federal income taxes to zero for persons 65 and over who make less than $50,000 a year. No other seniors would see an increase in what they pay to the IRS unless their income is $250,000 for a couple, or $200,000 for a single filer. It's true, as the McCain campaign likes to point out, that seniors who make less would be adversely affected by Obama's proposal to close down billions of dollars in tax preferences for corporations, which independent analysts calculate would flow through to owners of stocks and bonds in the form of lower dividend payments and reduced profits from capital gains. But while experts at the Congressional Budget Office and the Urban-Brookings Tax Policy Center tally this reduced income as "tax increases" for purposes of analyzing how proposed tax policies would affect different groups, it would not show up as an increased tax bill for any individual taxpayer, whatever their age.
"Welfare" or "Reform"?
The "welfare" claim rests on the argument, made in an Oct. 13 editorial in the Wall Street Journal, about refundable tax credits. Obama proposes to grant a number of refundable tax credits to low- and middle-income workers. For example, he would give a $500 tax credit ($1,000 for a couple) for workers, which would phase out for single workers making $75,000 or for couples making $150,000 per year. As the Journal editorial says: "You can receive these checks even if you have no income-tax liability." That's true enough. Whether or not that makes them "welfare" is a matter of interpretation, however. As the Journal editorial also says in its headline, "It depends on what the meaning of 'tax cut' is."
Fair enough. But McCain himself is proposing refundable tax credits of up to $2,500 a year for individuals, or $5,000 for families, as part of his health care plan. McCain doesn't call his credits a "tax cut" but he doesn't call them "welfare" either. He does call it tax "reform," right there on his own Web site:
McCain Web site: John McCain Will Reform The Tax Code . . . [E]very family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance. McCain makes his tax credit refundable to make it worth just as much to low-income workers as to high-income workers. If it were not refundable, it would be worth $0 to anyone who makes too little to pay any federal income taxes. A non-refundable credit would be worth the full amount only to individuals who owe at least $2,500 in federal income taxes, or couples who owe at least $5,000. Obama makes his tax credits refundable for the same reason – so they will benefit workers who earn too little to pay federal income tax.
Who's a "Taxpayer"?
Furthermore, the Journal's editorial misstated a key fact in its "welfare" argument. It said that anyone who doesn't pay federal income taxes is not a "taxpayer," which is simply incorrect. Here's what the editorial said:
Wall Street Journal editorial, Oct. 13: [Refundable credits] are an income transfer – a federal check – from taxpayers to nontaxpayers. Once upon a time we called this "welfare." ... Mr. Obama's genius is to call it a tax cut.The fact is, a worker can be a "taxpayer" whether or not they owe any income tax. Just about every worker is subject to federal Social Security and Medicare taxes totaling 7.65 percent on every dollar of earnings, up to $102,000 per year. (For earnings over $102,000, only the 1.45 percent Medicare tax applies.) Low-income workers, and retired and jobless persons as well, also pay federal excise taxes whenever they buy gasoline or pay a telephone bill, for example. Obama and other Democrats argue that for low-income workers, refundable tax credits are not “welfare” but, in effect, a reduction in their overall federal tax burden, counting payroll taxes.
Congressional Budget Office figures show that even those in the lowest-earning fifth of households pay an effective federal tax rate, on average, of 4.3 percent of their income, despite benefiting from existing federal refundable tax credits to a major degree. This group had average income of $15,900 in 2005, the most recent year for which CBO has done the calculations. But despite receiving "a federal check" through the income tax system that boosted income by an average of 6.5 percent (this shows up as a negative tax rate in the CBO tables), they still paid an average of $600 in federal taxes. That's true even after subtracting the effects of refundable tax credit "welfare."
Finally, the McCain ad's reference to "leading newspapers" is worth examining. All three are known for their conservative editorial opinions, and two are under the same ownership. The ad cites two others besides the Wall Street Journal. One is an editorial in the New York Post, which does not make the "welfare" argument directly but refers briefly to the Journal editorial of the previous day. The other is the Pittsburgh Tribune-Review, which made similar arguments and used similar figures in an editorial that appeared the day after the Journal's ran.
The Journal and the Post both are owned by Rupert Murdoch's News Corp., which last year purchased Dow Jones & Co., publisher of the Journal. And the Tribune-Review is owned by Richard Mellon Scaife, who has funded many conservative crusades over the years.
As for the star of this ad, Joe Wurzelbacher (a.k.a. Joe the Plumber): He told ABC News, among other news organizations, that he makes much less than $250,000, in which case he'd get a tax cut under Obama's plan. But, he said, he hopes to make that kind of money one day.
For now, Joe would certainly qualify for a tax cut under Obama's plan. According to his hometown newspaper, the Toledo Blade, publicly available divorce court proceedings show that he made $40,000 in 2006. And according to the Tax Policy Center's analysis, 93.5 percent of those making between $40,000 and $50,000 a year would see a tax cut under Obama's plan, averaging $1,124 for the year in 2012.
Correction, Oct. 20: As originally posted, we said that Social Security and Medicare payroll taxes totaling 7.65 percent are paid on earnings up to $102,000 a year. That's true of the 6.2 percent Social Security tax, but the 1.45 percent Medicare tax also is paid on earnings over that amount. We have added a line noting that.
—by Brooks Jackson
Editorial. "Obama's 95% Illusion; It depends on what the meaning of 'tax cut' is." Wall Street Journal, 13 Oct 2008.
Editorial. "READY, SET . . . SPEND!" New York Post, 14 Oct 2008.
Editorial. "Obama's tax cut: New Welfare Deal." Pittburgh Tribune-Review, 14 Oct 2008.
Congressional Budget Office. "Historical Effective Federal Tax Rates:
1979 to 2005," Dec 2007.
Tax :Policy Center. Table T08-0206 "Senator Obama's Tax Proposals of August 14, 2008," 14 Aug 2008.
Vellequette, Larry and Troy, Tom. "'Joe the plumber' isn’t licensed; Local man focus of presidential debate." Toledo Blade, 16 Oct 2008.