Is Obama’s Tax Plan Really a Welfare Program?

August 19, 2008

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 tax 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 credit (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 tax system, we had a flat tax 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 tax 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.

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