The Heritage Foundation - Leadership for America

Barack Obama argues that his tax rebates, many of which will go to households paying no income tax will “offset the payroll tax they pay,” and are, therefore, not welfare. But there are two big problems with this line of argument.

First of all, Social Security taxes (the main part of payroll taxes, constituting 6.2% out of the total 7.65%) are supposed to go in a special social security trust fund. The program is supposed to play the role of a retirement investment fund, except that some of the wealthier people’s tax dollars go to subsidize a social safety net. People pay what they can, according to how much they are able to work, and some redistribution occurs later, at the time of retirement.

Refunding the payments low-income workers make into social security at the time of payment bypasses that logic and changes the nature of social security. If Obama wants to change the nature of Social Security and Medicare by exempting low-income workers from payments, this should be laid on the table, not snuck in by quietly refunding payroll taxes. On the other hand, if the program is not being changed – if the workers are still paying in to social security but they just happen to be getting a tax credit – then he can’t cite their social security contributions as taxes which are being refunded. He can’t have it both ways!

But there is a second problem with this line of argument. Even after accounting for payroll taxes, Obama still adds to the welfare rolls considerably. According to the Heritage Foundation’s tax microsimulation model, Obama’s tax program would increase the number of IRS net recipients by about 24 million per year. Of these, 10 million are net-recipients even after accounting for what they paid in payroll taxes.

So, 10 million are additions to the welfare rolls that even changing the nature of Social Security and Medicare can’t explain away. Refunds to those who pay no taxes to the IRS (but may pay payroll taxes) would cost Obama about $30 billion per year, according to our microsimulation model. This accounts for about 40% of the cost of the new-credits portion of Obama’s tax plan, and 15% of the cost of his plan overall. In other words, leaving aside the part of Obama’s tax plan which extends some of the current tax rates, and just looking at his new tax cuts, 40% of the cost should actually be classified as welfare spending because it is tax rebates to individuals not paying taxes.