Many conservative critics of Obama’s tax plan, including yours truly, have objected that Obama has characterized as tax cuts what really amount to subsidies for non-taxpayers. But a few free-market types, most notably Ramesh Ponnuru and Dave Weigel, have pushed back against this. They both point out, correctly, that McCain also supports refundable tax credits in some instances — that is, the extension of tax benefits to people with little or no income tax liability. Ponnuru also observes that most of these workers do pay payroll taxes even if they don’t pay income taxes,
About three-quarters of tax filers pay more in payroll taxes than they do in income taxes. According to at least one study, middle-income households pay nearly twice as much in payroll taxes as they pay in income taxes. I’m not sure conservatives want to denigrate these taxpayers’ contributions to federal coffers, dismiss tax benefits for these working families as welfare or pass up an opportunity to cut their taxes.
That said, I still think Obama’s tax plan amounts to robbing Peter to pay Paul. He avoids cutting payroll taxes directly because he does not want to be seen as diverting revenue from Social Security (and unlike supporters of personal accounts, he isn’t altering benefits or improving workers’ rate of return on their forced contributions). So instead Obama uses the federal income tax code to offset their payroll taxes, the earned income tax credit on steroids. The result increases marginal rates and does little to enhance incentives for work or investment — in fact, the Obama tax plan does the opposite.
Ponnuru is probably right that this isn’t the best political case to be made against the Obama tax plan. It is probably more promising to point out the damage Obama’s promised tax increases will do while emphasizing that there will be more tax hikes where they came from. McCain should also be as aggressive in defending the tax-cut effects of his health care plan as Obama has been in describing that plan as a tax increase (while ignoring the tax burden imposed by his own health plan). But as conservatives seek ways to make tax cuts relevant again to workers who don’t have high income tax liabilities, they should find some language for saying that the Obama tax plan isn’t the right way to go about it.