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Is Obama’s Tax Plan Really a Welfare Program?

2 min readBy: Gerald Prante

In short, the answer is yes, according to Peter Ferrara writing in today's Wall Street Journal. Is Ferrara right? For the most part, yes.

Barack Obama is mainly using his 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. plan to redistribute income via higher marginal rates on those at the top to finance lump-sum transfers for those at the bottom. It's just that these lump-sum transfers are administered by the IRS via a 1040 as opposed to some other government agency that requires you to fill out a form. Using the IRS as a means of redistribution as opposed to traditional spending programs can be done for various reasons, most notably political given that it's easier to insert a provision into a tax bill than expand a government spending program. Such was the argument put forth by Stanley Surrey when he had Treasury first estimate a tax expenditures budget, as it has done for nearly 40 years now.

Many conservatives in the blogosphere will likely jump on this op-ed, but they themselves (and the candidates they support) have backed many of these types of provisions over the years, including the child 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. (and its doubling). Whether it is refundable or not, it doesn't really matter from an economist's perspective. Why is that? Suppose that instead of a progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. system, we had a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. of 30 percent on all income. But then the government set up a Department of Redistribution that wrote checks to everybody, based upon income levels and various other factors (family size, education, housing status, etc.), and thereby achieved the same distributional end as the progressive tax system. Is there any difference in principle (ignoring administrative/political issues) between these two government methods of redistribution? No.

Just as Obama's tax credits are like writing welfare checks to low-and-middle income families at the expense of high income families, many of the various deductions and credits already in the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. are no different than having the government write checks to families, many of which are actually high-income. This is why fiscal incidence analysis, although difficult, is necessary to perform true distributional analyses.

If McCain supporters want to point out Obama's support for what most policy experts on the left and right would consider undeserved welfare, they should attack his support for the welfare given to rich farmers every year, something McCain has consistently opposed.