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Would 101 Million Families Not Benefit from McCain’s Tax Plan?

3 min readBy: Gerald Prante

In an op-ed in this morning's Wall Street Journal, Obama economic advisors Austan Goolsbee and Jason Furman make this claim:

"In contrast (to Obama's plan), Sen. McCain's 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 largely leaves the middle class behind. His one and only middle-class tax cut — a slow phase-in of a bigger dependent exemption — would provide no benefit whatsoever to 101 million families who do not have children or other dependents, or who have a low income."

This statement is somewhat misleading given the use of the term "family." Family, according to Census, does not include singles, meaning that there are actually less than 100 million families in the United States, as defined by Census.

Properly interpreted, the 101 million figure is correct. However, it would be more correct to use the term "tax return" or "tax unit" instead of family. The average American may not understand the difference, but Furman and Goolsbee do.

Using the 2004 IRS public use file, here's what we can say (using 2006 IRS summary data available here will get you close but they cannot be used for additive reasons):

In 2004, there were a total of 132.2 million tax returns filed.

Of those 132.2 million tax returns, 49.3 million (37%) tax returns had at least one dependent exemption.

Of those 49.3 million tax returns with a dependent exemption, 26.7 (54.2%) million had a positive income tax after credits, meaning they would benefit from McCain's dependent exemption increase.

Of those 73.1 million tax returns that could be classified as a family per Census's definition of family (which I define as all MFJ returns, 1/2 of MFS returns, and all Head of Household returns), 26.7 million would benefit from McCain's dependent exemption increase, which means about 46.4 million "families" that file a tax return would not benefit. Add to that about 10 million families who don't file and grow the figure up slightly from 2004 to 2009, and the real figure is closer to about 60 million families who would not benefit from his plan.

In closing, 20.1 percent of tax returns would receive a tax cut, meaning 105.5 million tax returns would not receive a tax cut. If you exclude the dependent returns (mostly younger people who file just to get their money withheld back), that number is 95.8 million. Projecting that up to 2009 and you're pretty close to the 101 million figure cited by Furman and Goolsbee.

This is not an endorsement of McCain's dependent exemption increase. In fact, I would call it a terrible idea for many reasons. But the facts should be set straight, although in this entire campaign, facts aren't necessarily important to either candidate.

UPDATE: This verification was cited by Jeff Liebman, an Obama advisor, in a letter to the editor in the Wall Street Journal on September 4th. Liebman rightly uses the term tax filer.

Upon reviewing the figures again, it should be noted that some tax returns with zero income tax after credits could benefit from this, assuming they have refundable credits, dependents, and their income tax before credits exceeds zero. The number of these returns is around 10 million. Their benefit would likely be small because their income tax before credits is likely to be less than the dependent exemption increase and also because they are likely to be in low tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. (15 percent). Also, Liebman's use of the term "tax filer" would technically mean that the dependent returns would be included in the figure, thereby making the 101 million tax filer figure correct, even after accounting for the small benefit some refundable tax returns with dependents would receive. Also, as many in the Obama campaign have pointed out, no relief would go to the 15 million or so hypothetical "tax units" that earn too little to have to file.

Finally, a point omitted from the original blog post, it should be noted that the term "benefit" is also technically incorrect given that the economic incidence of the business tax cuts that McCain favors would likely benefit to some extent those 101 million tax filers who don't receive a direct taxA direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax. cut. How much? It depends, and that's a question for another day.