“Unfortunately, a close inspection of Obama’s proposals reveals something disquieting: he would raise marginal tax rates for many middle-income taxpayers, a bad move for anyone seeking to promote economic growth.
Although Obama is offering a new series of tax breaks, they undermine rather than improve economic incentives.The solid line in the nearby chart illustrates the effective marginal tax rate under Obama’s tax proposals (based on the authoritative “Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans,” published by the Brookings Institution/Urban Institute’s Tax Policy Center). These are the marginal rates in 2009 for a two-earner couple with two children—a college freshman and a 12-year-old receiving after-school care—under some specific assumptions. For comparison, the dotted line on the chart illustrates the effective tax rates under current law. The rates shown in the chart are not spelled out in the tax code; they are the result of giving and taking away tax breaks as the household’s income changes.
As the chart shows, Obama’s give-and-take tax policy results in marginal tax rates of 34 percent to 39 percent in the $31,000 to $45,000 income range for this family. That’s an increase of 13 percentage points or more from the current rates.
What accounts for the higher rates? First, Obama expands the maximum child and dependent care credit for families with one young child from $1,050 to $1,500 and phases down the credit over a longer income range, from $30,000 to $58,000. Throughout this income range, the credit is phasing out at a rate of $30 per $1,000 of income, thus raising the effective tax rate by 3 percentage points. Obama also makes certain credits refundable, which introduces a tax penalty of 10 percent or 15 percent, depending on the income bracket.
While Obama has publicly embraced a tax rate of 40 percent for couples earning over $350,000, his tax policies would result in a staggering 45 percent effective marginal rate in the $110,000 to $120,000 income range for this family. That is 11 percentage points higher than under current law.
The culprit in this case is Obama’s proposed reform of the Hope Scholarship Tax Credit for college tuition, which he would rename the “American Opportunity Tax Credit.” He would increase the credit’s maximum value from $1,800 to $4,000 while still phasing out the credit over the same income range, $100,000 to $120,000. The larger phase-out would boost the penalty on work from 9 percentage points to 20 percentage points.
While both candidates will reduce their tax plans to clever sound bites, voters should consider how those plans would affect incentives to earn income. Unfortunately, Senator Obama’s proposed “tax cuts for the middle class” are actually marginal rate hikes in disguise.” -The American
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