Friday, August 29, 2008

Addicted to credits 

In the middle of its editorial on the Obama nomination, the Wall Street Journal brings back an old classic: the Demogrant.
He is proposing a steeper tax increase than any recent candidate, yet he is selling it as a net tax cut. He justifies this by asserting that his eight "refundable" tax credit proposals for people who pay no income tax are "tax cuts." But such tax credits are really a government cash transfer from one taxpayer to a nontaxpayer. Mr. Obama is disguising the kind of pure income distribution that Mr. McGovern failed to sell as a $1,000 "Demogrant." Mr. Obama's packaging is post-ideological but his package is from the Great Society.
Interestingly, Hillary Clinton proposed the same thing with her baby grant last year, panned by John Hinderaker. Obama's comes through one of refundable tax credits in his plan:
Provide a Tax Cut for Working Families: Obama will restore fairness to the tax code and provide 150 million workers the tax relief they need. Obama will create a new "Making Work Pay" tax credit of up to $500 per person, or $1,000 per working family. The "Making Work Pay" tax credit will completely eliminate income taxes for 10 million Americans.
Because he calls for it to "offset the payroll tax they pay", Obama intends that to be a refundable credit. It's worth remembering that the Demogrant proposals of McGovern were intended to replace welfare programs; he eventually shelved the proposal and was hit again for vacillating on economic policy. (h/t: Extreme Mortman):
By talking during the primary campaign of giving what his advisers called a $1,000 "demogrant" to everybody�even though the proposal was meant to replace some existing welfare programs� McGovern excited the social reformers, who are a minority in America, while deeply offending multitudes who thought it contradictory to the work ethic (see THE ESSAY, page 96). As economist Arthur Okun, a McGovern adviser , puts it. "The things that helped him win the division pennant have hurt him in in the World Series." When McGovern belatedly buried the demogrant idea in August, he alienated many more people, who decided that in the realm of economics he simply does not know what he is talking about.
Obama also supports expanding the earned income tax credit and the dependent and child care tax credit, and a new universal mortgage credit. It's a dizzying array; one wonders, as did the Tax Foundation a year ago, why he doesn't just make it one big program. It leads to some of the funny marginal tax rates we discussed last week.

Buiter and Sibert have already written on the problems of the one tax credit Obama has co-authored in Congress (which did not pass). Note the one thing they approve of, the neutrality of companies in union organizing, is actually an attempt to bring card-check through the back door. What other kinds of mischief await in these other tax credits?

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