NCPA - National Center for Policy Analysis


October 22, 2008

Sen. Barack Obama (D-Ill.) is promising $500 and $1,000 gift-wrapped packets of money in the form of refundable tax credits.  These will shift the tax demographics to the tipping point where half of all voters will receive a cash windfall from Washington and an overwhelming majority will gain from tax hikes and more government spending, says Adam Lerrick, a professor of economics at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.

  • In 2006, the latest year for which we have Census data, 220 million Americans were eligible to vote and 89 million -- 40 percent -- paid no income taxes.
  • According to the Tax Policy Center (a joint venture of the Brookings Institution and the Urban Institute), this will jump to 49 percent when Obama's cash credits remove 18 million more voters from the tax rolls.
  • What's more, there are an additional 24 million taxpayers (11 percent of the electorate) who will pay a minimal amount of income taxes -- less than 5 percent of their income and less than $1,000 annually.
  • In all, three out of every five voters will pay little or nothing in income taxes under Obama's plans and gain when taxes rise on the 40 percent that already pays 95 percent of income tax revenues.

The plunder that the Democrats plan to extract from the "very rich" -- the 5 percent that earn more than $250,000 and who already pay 60 percent of the federal income tax bill -- will never stretch to cover the expansive programs Obama promises, explains Lerrick.

What next?

  • A core group of Obama enthusiasts -- those educated professionals who applaud the "fairness" of their candidate's tax plans -- will soon see their $100,000-$150,000 incomes targeted.
  • As entitlements expand and a self-interested majority votes, the higher tax brackets will kick in at lower levels down the ladder, all the way to households with a $75,000 income.

Calculating how far society's top earners can be pushed before they stop (or cut back on) producing is difficult.  But the incentives are easy to see.  Voters who benefit from government programs will push for higher tax rates on higher earners -- at least until those who power the economy and create jobs and wealth stop working, stop investing, or move out of the country, says Lerrick.

Source: Adam Lerrick, "Obama and the Tax Tipping Point; How long before taxpayers are pushed too far?" Wall Street Journal, October 22, 2008.

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