President Obama and Other People’s Money
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On Monday, the Obama Administration released a fact sheet detailing the package of “modest initiatives” the President will formally unveil in his State of the Union address. The proposals would create a new mandatory workplace savings program, expand tax credits for savings and child care, and cap student loan repayments.
The Administration proposes establishing a system of “automatic IRAs” in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA. Auto-enrollment is the practice of “making it easier” for employees to participate in an employer-sponsored retirement plan by making it harder for them not to participate. The finding that workers are more likely to participate in a retirement savings program when enrolled automatically is both empirically robust and obvious. Think of the inscrutability of the average paycheck: there are a number of line items that reflect automatic deductions from gross income (FICA, health insurance, life insurance, state taxes, etc.) that may not be readily understood by the worker. The plan here is simply to add one more.
As we have pointed out previously, the notion that government is “making it easier” for workers to save for retirement by requiring employers to automatically take money out of their paychecks misrepresents what’s actually occurring. “Automatic IRAs” are less about ease, and more about the presumption that people are making bad decisions. For example, the Obama Administration estimates that participation among the “poorest households” would increase from 15 % to 80 % through a universal account system. But does it make sense to divert the compensation of these liquidity-constrained households from current consumption towards retirement?
To make the diversion of current income more palatable, the Administration plans to supplement the required savings through a new saver’s tax credit that would match 50 percent of the first $1,000 of contributions by families earning up to $65,000. The credit would be fully “refundable,” which means workers could still claim the credit even when they don’t pay taxes.
As was the case in 2009, the Administration seeks to use the language of “tax cuts” to describe proposals to deliver cash subsidies to households through the Internal Revenue Code. Tax cuts are policies to allow taxpayers to keep more of the money they earn. As such, once a household no longer pays federal income taxes, any further “tax cuts” are actually spending increases that must be financed through the imposition of taxes on other households or businesses. These so-called “refundable” tax credits allow the Administration to continue to spend other people’s money while simultaneously claiming to respond to “95% of working families.” Of the $232 billion in tax relief for households in last year's stimulus bill, $111.8 billion (nearly 50%; see link at footnote 3) came in the form of outlays (direct cash payments from the Treasury to non-taxpayers). Last year, the Tax Policy Center estimated that 65.6 million tax units (a “unit” being roughly equivalent to a household) had zero or negative income tax liability. This means that 43.4% of all households either pay no federal income tax or receive a cash distribution from the IRS. The Obama Administration “tax cuts” resulted in $1,700 in average cash payments to non-taxpaying households over three years.
The expansion of these tax credits, which result in fewer households paying taxes and more checks being written by the government, is continuing. For example, the Administration currently has a proposal to expand the child care tax credit from 20% of qualified child care expenses to 35%. While this expansion is not intended to be a refundable credit, the interaction of the existing child tax credit and the expanded child care tax credit will remove more people from the tax rolls and result in more outlays. Take for example a family with two children that has a tax liability before credits of $3,000. Under current law, the family could offset $1,200 in child care expenses and claim $2,000 from the child tax credit for a net tax liability of – $200 (i.e. they get $200 from the IRS). Because the child tax credit is partially refundable, the interaction of the child tax credit with the expanded (35%) child care credit would reduce the household’s net tax liability to –$1,100. Under this scenario the family would first apply the expanded child care credit, which would take their taxes owed down to $900. They would then add the $2,000 from the partially refundable child tax credit and their tax liability would be -$1,100 (they get a check from the government for -$1,100). Even though the intent of the expansion is not to create a refundable credit, the interaction with other existing credits results in more cash payments to households.
Although these proposals are indeed “modest” relative to the health care effort, they nonetheless reflect an abiding faith in the inexhaustible supply of other people’s money to fund new programs initiated by a government that deems itself far wiser than the citizens who elected it.