Originally posted 10/29/2008Campaigning in Florida, Sen. McCain described Sen. Obama’s plan to cut taxes for 95 percent of American families by saying, “His plan gives away your tax dollars to those who don't pay taxes. That's not a tax cut; that's welfare.''
McCain argues that 40 percent of American families don’t pay taxes. More accurately, he means that many American workers in the bottom 40 percent of earnings do not have a positive income tax liability because they get a refund through the Earned Income Tax Credit that is bigger than the income taxes withheld from their paychecks.
However, that is not the same as not owing taxes. In fact, workers with the lowest earnings have a net positive federal tax liability from their Federal Insurance Contribution Act (FICA) tax. The FICA tax goes to support Social Security, but currently also builds up a surplus used to buy U.S. Treasury notes that finance the general operations of the government. In fact, after the individual income tax, the largest source of federal revenue is the FICA tax; last year the government took in $1.2 trillion in personal income tax and $870 billion in FICA tax, and took in roughly equal money from both income and FICA taxes in 2003.
Workers pay more than twice in FICA tax than the government receives from corporate income taxes. So, when Senator Obama promises to cut taxes he is only being fair to Latisha the practical nurse, and letting her share in tax relief as much as Joe the plumber would.
Senator McCain has argued to continue President Bush’s tax cuts for those making above $250,000 a year, arguing that those Bush tax cuts set to sunset in 2010 are vital to creating jobs. But, letting those tax cuts sunset would return the marginal tax rates for the wealthiest five percent back to what they paid when Bill Clinton was president.
With those higher tax rates in place, President Clinton generated almost 23 million jobs in his eight years of office. With the Bush tax cuts put in place, the economy under President Bush has generated fewer than five million jobs in eight years. So, I think the real plumbers and small business owners know that with falling new construction, declining construction jobs and two straight months of falls in retail sales, a tax cut that gets them more customers buying their goods and services would be a good and productive thing.
And jobs and job creation are clearly important for African-Americans. When the economy was generating those 23 million jobs with those higher tax rates, the unemployment rate for African-Americans fell to record lows, the share of African-Americans who were employed reached record highs, and so family incomes for African- Americans grew to record highs while poverty levels fell to record lows. Under the Bush tax cuts, today the unemployment rate for African- Americans is in double digits, poverty rates have climbed and incomes are still lower than the peak levels reached under President Clinton eight years ago.
Senator McCain is not offering tax cuts to those he thinks earn too little to deserve tax cuts. This is of great concern to African-Americans, because about 48 percent of African- American households fall in that category, roughly one out of two. As for the privileged households with incomes above $250,000 a year that Senator McCain thinks deserve a tax cut, less than one-half of one percent of African-American households fall in that category—one in two hundred!
But, it is also necessary to understand what those tax cuts mean. The Tax Policy Institute, an initiative of the widely respected Brookings Institute and the Urban Institute, project that cutting the tax rates for those high income brackets would cost the U.S. Treasury $1.6 trillion over ten years.
To put that in perspective, the government, under President Bush’s current budget, spent a little less than $500 billion on all discretionary non-defense items—meaning expenditures like Veterans health care, border and transportation security, civil and criminal prosecutions, the National Institutes of Health (as opposed to mandatory expenditures like Social Security, Medicare and Veteran’s retirement benefits).
Or, put another way, this is enough money to fund all federal programs in education, highway construction, small business assistance, space and science technology research, and veterans health benefits for ten years. So to off-set those tax cuts with cuts in federal spending would mean either wiping out broad categories of federal programs, or cutting back those programs and those of other domestic programs by one-third.
So, unlike the freeze for federal programs that Senator McCain has proposed in the presidential debates, his tax cuts would require draconian cuts in some very basic government functions—just to cut the tax rates for the five in one hundred Americans who are America’s wealthiest.
It simply isn’t straight talk to tell the American people that $1.6 trillion can be taken out of the federal government’s budget without inflicting some very painful elimination of programs that many Americans think are good, like research to solve our health care problems.
While the government must be pushed to do things as efficiently as possible, we have seen over the last eight years, whether it is the need to build solid levees, repair bridges or fund flu shots, that we have not been making enough public investments into things vital to a modern global nation.
What is also clear is that despite McCain’s stated promise to cut government expenditures, Americans simply cannot afford less Veterans’ health care, fewer roads or less support for our schools or student aid for our college students.
So, it is more likely that, like George Bush, Senator McCain will not be able to cut enough government expenditures to fund tax cuts for the wealthy. So, like George Bush, it is more likely that Senator McCain will simply run up the federal deficit.
The problem facing the economy with current job losses is a drop in demand from consumers. Senator McCain’s tax cuts exclude almost half of American families. That is not a formula for keeping consumers buying, and providing the revenue firms need to make profits and hire workers.
So, it is likely that like President Bush, Senator McCain’s plan to extend the Bush tax policies and force continued under investment in our schools and roads will also lead to the same rise in federal deficits and weak job creation of the last eight years.
Only for African-Americans eight years of double digit unemployment rates would push us back to the 1980s when African-Americans endured prolonged weak labor markets. That really is not a choice we can afford.
Dr. Bill Spriggs is chairman of the Department of Economics at Howard University.
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