John McCain has taken to calling Barack Obama a socialist for his plan to “spread the wealth” through refundable tax credits. What are refundable tax credits? Refundable tax credits are paid regardless of income tax liability. In other words, the credit doesn’t just offset your tax liability, but will result in a check from the IRS if you have no tax liability to offset. McCain has referred to this as socialism and to some degree I guess that is correct.
These credits are similar to what Milton Friedman called a negative income tax. The idea behind the negative income tax was that it would be superior to the various and sundry welfare programs and that is undoubtedly true. I much prefer cash payments to the poor to programs such as food stamps and welfare. If we are to have a social safety net, it seems better to give a check to those below a certain level of income and allow them to decide how it is best spent. Yes, some will spend it on things we don’t approve of, but that is their choice.
The only problem I have with Senator Obama’s plan is that it doesn’t eliminate other welfare programs and it is funded by making the tax code even more progressive. If his plan combined a flat tax with a larger negative income tax and the elimination of other welfare programs, I would support it wholeheartedly. Unfortunately, it doesn’t. We are nearing the point where a majority of Americans will not have any federal tax liability and that seems a dangerous situation. What incentive will citizens with no tax liability have to restrain government taxation and spending?
Senator Obama’s tax credits are certainly preferable to more direct government welfare programs but they are not a panacea. I am withholding judgement on the presumptive President until his plans become more clear. Merely “spreading the wealth” will not solve our problems.
The WSJ has an article today that explains refundable tax credits in more detail: