It now looks like half of President-elect Barack Obama's stimulus package will take the form of "tax cuts" for 95 percent of all Americans. Yet this wouldn't boost the economy as much as trigger a massive, unhealthy shift in American politics.
Under Obama's plan, the majority of American voters would pay no federal income taxes but would get money from the government instead. That is, these "refundable tax credits" are basically welfare checks — and Obama's plan would leave the most of us collecting, not paying.
A $200 billion giveaway won't do much to get a $14 trillion economy rolling again. But the plan would leave any future taxpayer revolt no hope of majority support.
Today, the bottom 50 percent of U.S. taxpayers pays a total of $30.6 billion in federal income taxes on a combined income of about $1 trillion. So about 3 percent of all federal income-tax payments come from the poorest half of the country. (The top 1 percent pays 40 percent; the top 25 percent pay 85 percent of the federal income tax.)
Obama's plan — he'd give all couples a $1,000 refundable tax credit and all single people $500 — would funnel more than $50 billion to the lowest half of the country, thereby completely wiping out their total federal tax liability. In most cases, it would trigger a "refund" welfare check.
In one stroke, this would transform the majority of voters from taxpayers into tax eaters, and leave an increasingly small minority to pay the bill. Regardless of whether this is good economics, it is very dangerous politics.
Essentially, it would put those who actually pay the taxes that fund our government into much the same situation as landlords in New York City: hopelessly outvoted by their tenants, who use their political clout to limit rents and landlords' profits.
Since Ronald Reagan, the anti-tax movement has been based on a blue-collar revolt against high taxes; it would lose that constituency under the Obama plan. Taxpayers would be politically helpless and the tax-eating majority would have free reign to impose any levies it wished.
Almost all of the 68 million tax filers in the country's bottom economic half would get checks from Washington at tax time. Some would be among the 22 million who get money from the Earned Income Tax Credit. Others would get a $500 check through the (Bush-passed) Child Tax Credit — and all would get funds through the new Obama tax credit.
Welfare no longer would be only for the poor because the majority of the voters would depend on government handouts. This very system is what makes European social democracies so resistant to change.
In 1980, the bottom 50 percent of the nation paid 7 percent of the national tax bill, after refund and credits. It now pays 3 percent; under Obama's plan, it would pay less than nothing (that is, it would net a profit from the IRS). In 1980, the top 1 percent paid 19 percent of the income-tax burden; now, it's 40 percent. Taxes have become the province of only the rich.
Of course, the shift in tax burden also mirrors the incredible increase in incomes of the wealthy during the past 30 years: The top 1 percent earned only 8 percent of the total national income in 1980; now, it earns 22 percent. And the poorest half has seen its share of national income fall from 17 percent in 1980 to only 12.5 percent today.
So it is both fair and sensible to give the poor a tax break and to draw the bulk of federal revenues from the rich. But to exempt the bottom half — a majority of the voters — from paying any taxes and to award them refund checks instead would dangerously alter the fundamental balance of national politics. For the economically well off, it effectively could become taxation without representation, which, as the founders of our nation warned, leads to tyranny.
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