Obama Tax Plan Aimed To Help Homeowners and Seniors: Who Else?

September 18, 2007

Illinois Senator and Democratic presidential candidate Barack Obama is set to announce his tax plan today that will include tax cuts for seniors and more subsidies to housing. Of course. Every politician wants to support Granny and the “American Dream.” From the AP:

Democratic presidential candidate Barack Obama is proposing more than $80 billion in annual tax relief for workers and seniors funded by an increase on wealthier investors.

Obama wants to give 150 million working Americans a $500 tax credit, expand relief for homeowners, eliminate income taxes for seniors making less than $50,000 and simplify tax returns so millions of Americans can file in less than five minutes, according to a summary document provided by his campaign.

More on the specifics:

Obama’s tax plan began with a “Making Work Pay” credit that would offset payroll taxes on the first $8,100 of earnings, generating up to $500 per person or $1,000 per family. The campaign said that would eliminate income taxes for 10 million low-income Americans.

Obama said more Americans who own their homes should get relief from mortgage payments. The current mortgage interest deduction only goes to those who itemize their taxes, while Obama would create a universal mortgage credit of 10 percent of interest payments that the campaign says would benefit an additional 10 million homeowners.

The campaign said Obama’s plan to eliminate taxes on seniors making less than $50,000 annually would mean 22 million elderly Americans would no longer need to file an income tax return or hire a tax preparer.

There is really no need for a new credit for low-income people. If Obama wants to accomplish the end he is aiming for, then the “Making Work Pay” credit could just be coupled with reforming/expanding the Earned Income Tax Credit and an expansion of the standard deduction rather than having some new credit designed to lower income taxes on low-income earners. Or he could move in the direction of the Tax Reform Panel and make a uniform Family Credit to replace the standard deduction, personal exemptions, and the child tax credit, and a uniform Work Credit to replace the complex EITC.

As for changing the way in which mortgage interest is treated, reform on this issue is long overdue. Unfortunately, Obama only seeks to expand the current subsidy rather than shrink it overall. While he does make the deduction more equitable by allowing those at the bottom end of the income ladder to claim it, his plan does nothing to limit the excess subsidy that exists to housing for those at the top end. If he wants to pay for these tax cuts for the low-income earners, he should start by making everyone take this new mortgage interest credit instead of allowing those with high incomes to continue deducting up to 35 percent of their mortgage interest (depending upon phase-outs). Unfortunately, however, it may be politicial suicide for a presidential candidate to endure the wrath that would inevitably come from the special interests groups that back the mortgage interest deduction if one tried to significantly reform it.

As for not making seniors file a tax return if their incomes are below $50,000, it sounds like it may make the the tax system simpler, but many seniors would still have to do much of the work involved in determing whether their incomes are above $50,000 due to the multiple income sources they often have, such as capital gains, dividends, Social Security, retirement pensions, etc., even if they didn’t have to officially file with the IRS. Furthermore, an issue of generational equity comes up here if this were to be made permanent because some people have already paid taxes on their retirement income if they are enrolled in a ROTH plan.

And here’s the obvious question — why should seniors receive special tax treatment anyway? Why should a 35-year old single person making $40,000 in wage income have to pay more in taxes than a senior who lives off $40,000 of retirement income (assuming it wasn’t previously taxed)?

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