More on Obama's Tax Plan
Suppose you, like about a third of all tax filers, are currently paying no federal income taxes. You decide to send your child to college, thus qualifying for "A Refundable $4,000 American Opportunity Tax Credit." You are now getting $4000 a year from the government. Labeling it a scholarship or a subsidy, which is what it is, instead of a tax credit, increases both total taxes and total expenditures by $4000. Similarly for the $1000 "making work pay" tax credit, the 10% mortgage interest tax credit, and the health care tax credits.
Current college enrollment is over 10 million full time students, about 5 million part time. If we assume that the credit only applies to full time students, that comes to a total of over forty billion dollars a year. A majority of it will go to reduce taxes paid--more than two-thirds, since higher income people are more likely to send their children to college--and so conventionally goes on the tax side of the calculation, although people have been arguing for a long time that such "tax expenditures" ought to go on the expenditure side. But quite a lot will be money paid to people who were paying no taxes.
This part of Obama's plan is represented as a way of helping people afford college, which it is. But it is also a massive subsidy to low end colleges. The credit only applies to tuition expenses, so if you send your child to a community college that only charges $2000/year, you only get a $2000/year trax credit. But once the proposal is implemented, there won't be any colleges charging $2000/year, or at least very few. Raising tuition to $4000/year increases the income of the college at no cost to the students, so any sensible college now charging less than that will do so. I expect a lot of college professors will be voting Democratic this year, but that is nothing new.
The "Making Work Pay" tax credit, if I correctly read the numbers, costs about another $75 billion dollars. Again, most of that will go to reduce taxes, some of it as payments to people not now paying taxes. The Child Care tax credit looks to come to ten or twenty billion. The Health Care tax credit is not explained in any detail, at least in what I found, so I cannot estimate its size.
If we count all of the refundable tax credits as expenditures, I suspect that Obama's claimed reductions in total taxes and expenditure turn into an increase, although I do not have the data to be sure. I don't know what happens if we count only refunds that are actually paid out, rather than used to reduce the amount the taxpayer pays in.
The general problem, the ambiguity between cutting taxes as a way of subsidizing activies one wants to subsidize and paying out the money directly, is not a new one, so one can hardly blame Obama and his campaign for it. But it is an important one. Transfer payments make up a very large share of the federal budget. With sufficient ingenuity, one could eliminate essentially all of them from the expenditure side by relabelling them refundable tax credits, thus producing, on the books, an enormous reduction in both expenditures and taxes, while actually changing nothing at all. Obama seems to be moving things at least a little farther in that direction.