Taxpayers With Zero Liability Would Increase Under McCain And Obama

by Leroy Baker, Tax-News.com, New York

24 September 2008

A newly released study from the Tax Foundation shows that while current law would give 33% of tax filers zero liability next year, that figure would increase to 43% or 44% if John McCain's or Barack Obama's (pictured) tax plans were enacted in 2009.

Tax Foundation President Scott Hodge estimates that while 47 million tax filers would see zero liability under current law in 2009, if all of McCain's or Obama's tax provisions were instituted next year, the number of "non-payers" would rise to 62 or 63 million, respectively.

"Both the McCain and Obama plans would increase this number by expanding existing tax benefits or creating new ones," says Hodge.

"The 15 million filer increase in non-payers under the McCain plan is almost all due to McCain's health care credit, which dramatically realigns health care incentives and gives people a powerful motive to buy health insurance. Obama uses a longer list of smaller tax credit ideas, including a new ‘Making Work Pay Credit' and a ‘Universal Mortgage Credit,' to take 16 million filers off the tax rolls," observes Hodge.

The Foundation points out that the tax code has historically contained provisions that reduce the income tax burden for lower-income workers, giving around 21% of filers no tax liability from 1950 to 1990.

Since the early 1990s, Hodge explains that lawmakers have increasingly used the tax code, instead of government spending programs, to funnel money to groups of people they want to reward, enacting credits to subsidize families with children, college students, and purchasers of hybrid cars.

Hodge urges a public debate over the costs and benefits of narrowing the tax base and using the tax code to further social and political goals.

"For many folks, tax returns have become, in effect, a claim form for a subsidy delivered through the tax system rather than a direct payment from a traditional government program like welfare or farm supports," Hodge states.

"It is time for a serious public discussion of whether it is desirable to have so many Americans disconnected from the cost of government and what the consequences are of using the tax system as a vehicle for social policy," he argues.

Hodge says that some of those consequences include added complexity for low-income Americans who pay tax preparers to benefit from the earned income tax credit (EITC), punitive effective marginal tax rates for taxpayers in the phase-out range of the EITC (higher rates than even the most affluent Americans, according to the President's Tax Reform Panel), and revenue volatility due to a narrowing base as higher-income taxpayers include wildly fluctuating business, dividend and capital gains income.

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