Barack Obama has claimed he would lower taxes on 95% of workers — even though more than 40% of tax filers don’t even pay taxes. What he says is true, but what it really means is that he is reintroducing a massive increase in the welfare state, costing about $30 billion per year. According to the Center for Data Analysis’ microsimulation modeling, Obama would increase the number of tax filers who receive a check from government without paying any taxes, including payroll taxes — people filing just to receive a welfare check — by about 10 million. Where will the $30 billion per year come from? From those who are paying taxes, of course. And indirectly from all of us, when the economy is dragged down by higher tax rates on businesses.
What is even more frustrating is that many low-income households would actually have higher effective marginal rates under Obama’s proposal than under McCain’s proposal. This means if these households increase their earnings, they will be faced with new tax burdens, so they are better off staying poor. Obama’s plan would particularly hit those under 200% of the poverty line. According to our microsimulation modeling, Obama would effectively be extending the poverty trap. This is something his own economic adviser has warned against. The reason for the higher marginal rates is the fact that Obama is increasing credits for the poor, rather than reducing taxes for everyone. When the tax credits phase out, the marginal rates on these households increase.
So to recap, Obama’s plan increases the number of welfare recipients, and extends the poverty trap of poor households.