Redistribution You Can Believe In

American workers should beware the siren song of “the Redistributor.”

By Rich Lowry
Friday, October 31, 2008

The growing cast of characters at McCain rallies includes Joe the Plumber, Tito the Builder and now “Barack the Redistributor.”

John McCain is keying off Barack Obama’s comment to Joe the Plumber about “spreading the wealth around,” and his 2001 rumination in a Chicago Public Radio interview about the Supreme Court “redistributing the wealth.” Cautious even then, Obama didn’t commit himself on whether the Court should force “redistributive change,” but his use of the R-word was enough to make it his moniker at McCain events.

Obama is an exotic bird — a self-described tax-cutter for “95 percent of working Americans,” with a predilection toward socialistic language and concepts. The key to the riddle is the nature of his tax program.

Obama proposes a dog’s breakfast of tax credits, including a $500 refundable work credit that applies even to people who owe no income taxes. The Internal Revenue Service would cut them a $500 check every year. This essentially is a government payment dressed up as a tax cut. It will be partly funded by new taxes on the top 5 percent. So Obama is redistributing wealth, but in an eminently salable way. Call it “redistributive change we can believe in.”

Obama’s plan wouldn’t, like cuts in marginal tax rates, increase the incentive to work, invest or save. In fact, the opposite. As tax credits phase out, they increase marginal tax rates. But for Obama, his plan is a matter of justice rather than economics.

When in a Democratic primary debate Charlie Gibson of ABC News pointed out to Obama that increasing the capital-gains rate in the past has initially reduced revenue, Obama replied that he wanted the increase “for purposes of fairness.”

But how unfair is the American tax system? It’s already steeply progressive. IRS data show that the top 1 percent of filers paid 40 percent of federal income taxes in 2006. The top 5 percent paid 60 percent. The top half paid 97 percent.

According to the congressional Joint Economic Committee, these are the highest tax shares paid by these income groups since 1986. The bottom half of filers, in contrast, pays 3 percent. Millions of these people have an income-tax liability less than zero, because they receive already-existing refundable tax credits.

Obama couches his work credit as relief from the payroll tax funding Social Security. Even here, the system is already redistributive. American Enterprise Institute economist Andrew Biggs points out that low earners get a roughly 4 percent rate of return on their Social Security taxes, while high earners get a 1.5 percent rate. Obama would heighten the disparity, “pushing it closer toward a welfare-program approach.”

None of this means average workers aren’t under stress or that tax credits in themselves are nefarious. Rising health-care costs have eroded wages, and McCain has a well-considered policy — including a tax credit — to help workers cope with these costs. An intelligently crafted increase in the per-child tax credit, meanwhile, would counteract the perverse redistribution of our entitlement system — from households with children to childless adults.

But Obama’s tax program pursues a foolhardy goal — redistribution for its own sake — in an unworkable manner. As Alan Reynolds of the Cato Institute has written, between his tax credits and other proposals, Obama is seeking to balance some $4.3 trillion of new spending over the next 10 years on the top 5 percent of earners.

Experience shows that raising taxes on these earners doesn’t produce as much revenue as expected, thanks to what economists call “the elasticity of income” — i.e., people find ways around the Tax Man. Regardless, there’s simply not enough money to be had from “the rich.” This is why socialistic European countries have tax systems arguably less progressive than ours. To fund their extensive welfare states, they must resort not only to onerous income-tax rates, but to high payroll and sales taxes paid by everyone.

American workers should beware the siren song of “the Redistributor.”