Credit That Obama Calls A Tax Cut Will Be Of Zero Help To Economy

Barack Obama says he supports a tax cut for 95% of all Americans. He is referring here to his proposal for a $500 refundable income-tax credit for all workers, except those in the top 5% of income earners.

These folks, for some reason, are to be singled out for "special treatment" — i.e., tax increases — unless, as he recently told ABC anchor George Stephanopoulos, "the economy remains weak."

So apparently even Obama recognizes that his tax increases would be economically harmful.

• Because Obama's tax credit does not reduce marginal tax rates, it will not benefit the economy. It provides no added incentives for work, savings, investment or business expansion.
  

Because it's refundable (meaning workers get it even if they have little or no income-tax liability), for many it will involve just another check from the government, rather than a reduction in tax liability. In those cases, it would not be a tax cut at all, but a transfer payment and a direct drain on tax revenues.

• McCain proposes to double the personal exemption for each dependent from $3,500 to $7,000, for all families regardless of income. For middle-class workers in the 25% tax bracket, this $3,500 increase would reduce their tax liability by $875 for each child. While this tax cut also does not involve a reduction in marginal tax rates, it will promote working families with children.
  
• But McCain also proposes marginal tax-rate reductions that do promote economic growth and encourage investment. Because America today suffers from the second-highest corporate tax rates in the industrialized world, McCain would help restore American competitiveness by reducing the federal corporate tax rate from 35% to 25%. This would benefit the middle class and workers by creating new jobs, at better wages, while strengthening the dollar.
  

It may even raise, rather than reduce, revenues. According to a 2007 study by the Treasury Department, Ireland — with a 12.5% corporate tax rate — raises almost 50% more revenue on a comparative basis than the United States does with a 35% rate.

• McCain further proposes to phase out the alternative minimum tax, which would otherwise burden 25 million middle-class families. This will save middle-class families $2,700 each year on average, an overall middle-class tax cut of $60 billion per year.

• Obama, by contrast, has proposed to raise marginal tax rates for almost every federal tax — the individual income tax, the capital gains tax, the dividends tax, the payroll tax, the death tax, etc. He would further increase corporate taxes through such measures as the windfall profits tax on oil companies.
  

These marginal tax rate increases would dramatically discourage savings, investment, business expansion and job creation. Such tax increases would consequently slow the economy even further and reduce jobs and wages for working people and the middle class, while simultaneously weakening the dollar.

Kemp, a former HUD secretary and congressman, is chairman of Kemp Partners.

Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation, and formerly served in the Reagan White House.