Mr. Obama's Cookie Jar
DEMOCRATIC presidential candidate Barack Obama last week proposed $80 billion or so in tax cuts for middle-class taxpayers. These are the sort of have-a-cookie proposals that sound great to voters, especially Democratic primary voters, so they might be smart politics. That doesn't make them smart policy.
Ostensibly, Mr. Obama would pay for his giveaways with a hazy combination of closing corporate loopholes, cracking down on international tax havens, and raising taxes on capital gains and dividends. Even if it made sense to spend all this revenue to shift tax burdens rather than deal with other problems, the Illinois senator's proposals are poorly crafted, lavishing tax goodies where they're not needed.
Start with by far the most expensive part, a refundable tax credit of up to $500 per individual or $1,000 per family. This would phase out as incomes rose, but why do families making as much as $200,000 a year need new tax help? Since 2001, they've had their tax rates cut and gotten a child tax credit; the middle-class tax burden is at its lowest level in decades. Mr. Obama says he wants to help families squeezed by stagnant wages, but this is an awfully expensive Band-Aid.
The second piece of Mr. Obama's plan is better: a new mortgage credit of 10 percent of mortgage interest costs. This would add complication to a tax code that Mr. Obama simultaneously promises to simplify. But it would have the advantage of fairness, extending the tax benefits of the home interest deduction to those who don't earn enough to itemize or, because the credit would be refundable, to those who don't owe income taxes. But Mr. Obama lacks the courage simultaneously to propose reasonable limits on the mortgage deduction for mega-mansions.
Perhaps the most troubling part of Mr. Obama's plan is his proposal to exempt seniors making $50,000 a year or less from paying income tax. Seniors already enjoy government benefits and preferential tax treatment; it makes little sense, except as a political matter, to ask less of them.
Former North Carolina senator John Edwards has a tax plan that is less expensive (about $25 billion a year) and smarter, targeted at taxpayers who need the most help and at creating incentives for savings. Mr. Edwards would expand the existing Savers Credit to match savings up to $500 a year for retirement, education or home down payments. He also would triple the earned-income tax credit for childless adults and make other changes in that valuable program; Mr. Obama has similar plans for the EITC, but that $3 billion proposal would come on top of his $80 billion-plus in middle-class tax goodies.
If a candidate wants to spread around tens of billions a year in tax largesse, the Edwards plan is a preferable, and more fiscally prudent, way to do it.
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