NCPA - National Center for Policy Analysis


October 24, 2008

Under Barack Obama, 95 percent of Americans will get a "tax cut" and those on the receiving end of a check will include the estimated 44 percent of Americans who will owe no federal income taxes.  Sounds like welfare, says the Wall Street Journal, however, supporters say that even those who pay no income taxes still pay payroll taxes, and these Americans would get an income tax credit of up to $500 based on what they are paying to Social Security.  

Just two little questions: If people are going to get a tax refund based on what they pay into Social Security, then we're not really talking about income tax relief, are we?  And if what we're really talking about is payroll tax relief, doesn't that mean billions of dollars in lost revenue for a Social Security trust fund that is already badly underfinanced?

According to Andrew Biggs, a scholar with the American Enterprise Institute, to understand the unintended consequences of the Obama plan, it helps to remember that while people at the bottom pay a higher percentage of their income in payroll taxes, they are accruing benefits in excess of what they pay in:

  • By expanding benefits for people whose benefits exceed their taxes, you're increasing their disincentive for work and you're doing the same at the top of the income scale, where you are raising their taxes so you can distribute the revenue to others.
  • Even more interesting is what Obama's "tax cuts" do to Social Security financing; Obama proposed to pay for payroll tax relief out of, well, payroll taxes, his plan would never have a chance in Congress; most members would look at a plan that defunded a trust fund that seniors are counting on for their retirement as political suicide.

That leads us to the heart of this problem, says Biggs.  If the government is going to give tax cuts to 44 percent of Americans based on their Social Security taxes -- without actually refunding to them the money they are paying into Social Security -- Obama will have to get the funds elsewhere.  And this is where "general revenues" turns out to be a more agreeable way of saying "Other People's Money."

Source: William McGurn, "Obama Talks Nonsense on Tax Cuts," Wall Street Journal, October 21, 2008; and Andrew Biggs, "Notes on Social Security Reform,", October 20, 2008.

For text:


Browse more articles on Tax and Spending Issues