Obama’s Tax Proposals Head in Opposite Direction of Fundamental Tax Reform

November 7, 2007

As the presidential campaign season continues, politicians on both sides of the aisle have been coming out with all sorts of proposals to use the tax code to achieve whatever social goal they want, many of which appear as if no deep thought was put into them. Politicans like to use the tax code because traditional spending to accomplish these goals would make them look like a “big spender.” But if you use the tax code, you can look like a “tax cutter” by targeting some goal via tax deductions or credits at the expense of higher rates on everyone else, higher deficits, or lower traditional spending. Democratic candidate Barack Obama has been one of the leading proponents of using the tax code for all sorts of goodies that he has decided should be pursued. The latest from The Hill Newspaper:

White House hopeful Sen. Barack Obama (D-Ill.) unveiled a package of tax breaks and programs Wednesday in Iowa that he said would help middle-class Americans.

As part of the initiatives, the senator proposed a $1,000 cut on payroll taxes for working families, the elimination of income taxes on retirees making less than $50,000 a year, a 10 percent tax credit on mortgage interest payments and a $4,000 tax credit for college tuition.

“We’re tired of tax cuts for the wealthy that shift the burden onto the backs of working people,” said Obama, who is trailing only Sen. Hillary Rodham Clinton (N.Y.) in the race for the Democratic nomination. “We need to give working families a break.”

Obama said: “We need to give working families a break.” Ask yourself — what does that even mean? It’s like the term “social justice.” It has no meaning. Just as everyone thinks their view of the world is what would constitute “social justice,” everyone considers himself to be in a “working family who deserves a break.”

As for Obama’s specifics, expanding the tax preferences for housing by pursuing a credit for mortgage interest while doing nothing to reduce the current MID system is not sound tax policy. Moving to a credit that scaled down the preferences for housing and made them more equitable would be good tax policy, but that requires severely limiting the current tax subsidies to housing too.

As for more tax credits for college, the first question is just why? Can Obama justify that this policy of merely expanding tax credits for higher education is the best way to promote the positive externalities that come from higher education? In reality, it’s probably one of the worst ways to achieve that goal. And the second question should be is this really going to make college that much more affordable given that some colleges could merely respond by raising tuition even further?

And finally, on the issue of the payroll tax cut: does that $1,000 reduction in payroll taxes also mean that the person would have $1,000 less credited to his Social Security “account” and thereby receive lower retirement benefits at age 65 or so? And if so, that sounds a lot like being a small step in the direction of “privatization” where the worker gets to determine what he/she wants to do with that $1,000 (i.e. consume it today or save for retirement in some other form outside of Social Security). Shhh. You can’t say that P-word too loud in Washington. The AARP may be listening.

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