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Getting To 95 Percent

By Philip Klein on 10.17.08 @ 2:54PM

As a follow-up to my article on the main site, I have received an email from Brian Deese, an economic policy adviser for the Obama campaign, as to the rationale behind the campaign's claim that 95 percent of Americans would receive a tax cut under his proposals. The gist of his response is that the Obama team ties its refund payments to payroll taxes. While about a third of Americans don't pay any income taxes, for the most part, they have to pay payroll taxes (there are exceptions, for instance, some state employees). Even though the plan doesn't reduce effective marginal tax rates on 95 percent, Deese said that the campaign is on safe ground arguing that it would do so based on actual dollar tax liabilities after refunds, and he cited this chart from the Tax Policy Center. Also, he noted that the McCain campaign has claimed its health care tax credit as a tax cut, too.

Here's more detail from Deese's email:

Obama’s Making Work Pay Tax Credit will directly cut taxes for 95% of all workers. It is structured as an offset to the payroll tax paid by all individuals who have positive wage income under $150,000. The MWP credit offsets payroll taxes on up to the first $8,100 dollars in earned income – (which is taxed at 6.2% payroll tax on the employee side) – resulting in up to a $500 tax cut per worker and $1,000 per working couple. The campaign arrived at the estimate that 95% of workers would benefit from the MWP credit – and get a tax cut - by deriving the number of workers in the economy who have positive wage income, but earn less than $150,000 (above $150,000, the MWP phases out)....

The other issue that is important to clarify is that when the McCain campaign asserts that “32%” (or 40%) of all workers pay no income taxes, this is misleading. Obama’s Making Work Pay Tax Cut directly offsets the first $500 of payroll tax that a worker pays each year. It is therefore ONLY available to workers who pay payroll taxes, and no worker receives a tax cut that exceeds their payroll tax payments. Since its inception in 2007, this was the design of the Making Work Pay Tax Cut: “This refundable income tax credit will provide direct relief to American families who face the regressive payroll tax system. It will offset the payroll tax on the first $8,100 of their earnings while still preserving the important principle of a dedicated revenue source for Social Security." Accordingly, the allegation that the Making Work Pay Tax Cut goes to workers who do not pay income taxes is entirely misleading – the 95% of workers that Obama claims will benefit are all workers who pay payroll taxes, and none will receive a tax cut from the MWP cut that is greater than their payroll tax liabilities.

Deese's response raises another interesting point. If Obama is serious about cutting payroll taxes, he could either reduce the current rate or, alternatively, restructure the tax so that it only kicks in after the first $8,100 of earned income. However, one of the liberal criticisms of Social Security personal accounts is that allowing workers to divert a portion of their payroll taxes would threaten the system by reducing the amount of revenue available to fund current retirees. So Obama doesn't want to outright cut payroll taxes. The whole complicated  refundable tax credit formula allows him to argue that he's providing lower-income workers with payroll tax relief, while deflecting scrutiny from those who are concerned about removing money from the Social Security system.