Today, an Associated Press article released from the campaign trail in New Hampshire detailed Obama’s speech on taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy to a local restaurant (where no sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. is charged, by the way).
At a Nashua restaurant, [Obama] renewed his pledge to make the nation’s tax system more fair.
“We’ve got a tax code that’s making things worse. This isn’t an accident,” he said. “Special interests in Washington have carved out a trillion dollars worth of corporate tax loopholes at a time when income inequality is larger than any time since before the Great Depression.”
“George Bush’s tax cuts, for example, went disproportionately to the top 1 percent of the population,” Obama said.
He says his tax plan would give 150 million workers a $500 payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. credit, expand relief on mortgage interest, eliminate income taxes for seniors making less than $50,000 and simplify returns so millions could file in less than five minutes.
While Obama is right in his criticism that there are too many tax loopholes, he doesn’t seem to understand that they come in all shapes and sizes. One person’s tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. is another person’s loophole. If one defines “loophole” as someone legally escaping taxation on some income source for some reason, then we have plenty of those in the code. And the deduction for home mortgage interest is one of the biggest.
Obama also claims that he wants to simplify the code. Yet expanding the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. to more taxpayers and having a $500 payroll tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. actually goes in the opposite direction. Furthermore, while seniors may save from not having to file a tax return each year, many who end up not having to file will still have to go through much of the work of adding up their income to ensure that they are below that $50,000 income threshold.
While many may disagree with the belief of the candidates on the left that the tax code needs to be made more progressive, even those on the left who are seeking to achieve that goal appear to be putting out tax plans that make it more progressive in the worst possible way. Those who seek to make the tax code more progressive on the Democratic side can do so in a much better and simpler way than expanding deductions and credits for low-income people. They could do so by overhauling the tax system, which does have many deductions and credits that tend to overwhelmingly flow to upper-income individuals. Then they could lower rates significantly for those at the bottom or across the board. Unfortunately, they appear more favorable to trying command economy-like policies where they arbitrarily determine the allocation of resources through arbitrary tax credits paid for by arbitrary tax hikes.
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