Obama Is So Clueless About Federal Taxes

By Peter FerraraDirector of Entitlement and Budget Policy, Institute for Policy Innovation

Yesterday President Obama said that average Americans:

". . . need a government that is working to create jobs and opportunity for them, rather than simply giving more and more to those at the very top in the false hope that wealth trickles down . . .We start from the simple premise that we should reduce the tax burden on working people. . ."

Obama presents here a false caricature of America's tax policy in the time before he became president, with tax cuts supposedly going only to the rich, while working people and the middle class bore the tax burden.

By contrast, the bottom 40% of income earners, who lefties like Obama often refer to as "working people" or the "working class," as a group already paid no income taxes. Instead, they received net payments from the tax system equal to 3.8% of total income taxes. In other words, the bottom 40% paid negative 3.8% of total federal income taxes.

In addition, the middle 20% of income earners, the actual middle class, paid just 4.7% of total federal income taxes, before Obama even won the election.

These relative tax burdens were actually the result of Reagan Republican supply side economics that began with Reagan and Jack Kemp in the 1970s and 1980s, continued through Newt Gingrich and his Contract with America, and further played out with the Bush tax cuts of 2001 and 2003. Reagan and his Republicans in fact had already abolished income taxes on Obama's "working people" or "working class" when Obama came into office, and had almost abolished them for the actual "middle class."

It was, in fact, Ronald Reagan who first proposed in the 1970s the Earned Income Tax Credit (EITC) that has done so much to reduce income tax liabilities for lower income people. As president, he cut federal income tax rates across the board for all taxpayers by 25%. He also indexed the tax brackets for all taxpayers to prevent inflation from pushing workers into higher tax brackets.

In the Tax Reform Act of 1986, he reduced the federal income tax rate for moderate income workers all the way down to 15%. That act also doubled the personal exemption, shielding more income from taxation for everybody.

Newt Gingrich's Contract with America adopted a child tax credit of $500 per child that reduced the tax liabilities of lower income people by a higher percentage than for higher income people. President Bush doubled that credit to $1,000 per child, and made it refundable so that low-income people who do not even pay $1,000 in federal income taxes could still get the full credit. Bush also adopted a new lower tax bracket for the lowest income workers of 10%, reducing their federal income tax rate by 33%. He cut the top rate for the highest income workers by just 11.6%, from 39.6% to 35%.

These are the tax cuts adopted over the last 30 plus years that brought us to the point where federal income taxes were already abolished for the working poor and what some people term the working class, and almost abolished for the middle class. Clearly, somebody thought of cutting taxes for working people long before Obama showed up.

What Obama has added to the mix, his tax cut for 95% of Americans, turned out to be a miserable $400 per worker tax credit, less than $8 per week. That tax credit actually will not reduce taxes at all for the bottom 40% of income earners who were already not paying federal income taxes, because you cannot cut taxes for someone who is not paying taxes.

Obama's people again tried to confuse this issue yesterday, with White House economist Jared Bernstein saying that while it is true that these workers do not pay income taxes, they do pay payroll taxes. Yes, it is true they pay payroll taxes, but Obama is not cutting anyone's payroll taxes!His tax cut is a $400 per worker income tax credit that does not cut payroll taxes, and cannot and does not reduce income taxes for anyone who does not pay income taxes.

Obama also said yesterday that his $400 per worker tax credit "will save or create over half a million jobs." But it will actually save or create exactly zero jobs. That is because borrowing $400 from the private sector to give someone else $400 does not add anything to the economy on net. Moreover, the tax credit does nothing to change the incentives that govern the economy. To change the incentives to save, invest, start businesses, expand businesses, create jobs, and produce, you have to reduce tax rates, not send workers $400 checks. That is what Reagan did, and that is why his economic program created a 25 year economic boom.

Peter Ferrara is Director of Entitlement and Budget Policy for the Institute for Policy Innovation, among other posts. He served in the White House Office of Policy Development under President Reagan.