Refundable Tax Credits=Socialism?

By :: October 21st, 2008

John McCain says Barack Obama’s enthusiasm for refundable tax credits amounts to socialism. Wow.

This is interesting for so many reasons. To start, the mother of all refundable credits is the Earned Income Credit, which is the largest poverty program in the U.S. and distributes $42 billion to more than 20 million low-income families. It was enacted during the Presidency of well-known leftist Gerald Ford, and has been expanded repeatedly ever since, most recently by President Bush in 2001.

It is also interesting because over the next decade, John McCain himself would distribute $1.3 trillion in refundable credits (net of the taxes workers pay on their employer-sponsored insurance) to help people buy health coverage. It is true that Obama would be somewhat more generous—he’d give both individuals and small businesses about $1.5 trillion to buy insurance. If this turns Obama into Eugene V. Debs, I suppose it would make McCain a clone of Norman Thomas.

McCain also seems to be implying that a progressive tax system is itself socialistic. This is somewhat surprising since, while McCain would make the code somewhat less progressive than it is today, I had not heard that he favored abandoning the entire principle. Of course, he has proposed an optional individual tax system that he has never really described but which, in some forms, would be far less progressive than the current system. So maybe I am wrong about McCain’s enthusiasm for a new tax code that distributes wealth from the middle-class to the rich. If I were McCain, though, I probably wouldn’t advertise it.

Finally, given the recent move by the Bush Administration to buy $250 billion in bank shares and its vow to spend many hundreds of billions more to bail out other failed financial institutions (a law both McCain and Obama voted for), I am not entirely sure I could tell you the difference between Bushian capitalism and contemporary socialism.  

For all of that, however, McCain does raise some important issues. What is it with Obama’s, may I say, liberal use of refundable credits?  He’d give them to working families, homeowners who don’t itemize, parents whose kids are in child care, savers, employers who hire new workers, and, of course, buyers of health insurance. Oh, and he'd once again expand the earned income credit.

All of this, fumes McCain, is spending. And on that point, he is largely correct, not only about refundable credits but all sorts of other tax expenditures aimed at both individuals and businesses. One can argue that the EITC is a backdoor way to cut payroll taxes for low-wage workers without messing with Social Security. But it is much harder for Obama—and McCain—to make the case for refundable health care credits.

These are not tax credits in any meaningful sense of the words. They are vouchers. Obama admits as much when he claims in mock outrage that McCain would be giving his credit directly to insurance companies. Well, of course he would. Where else would you buy insurance?

McCain is right that this is spending in drag. And there are good reasons to ask whether we really want the IRS to run both our welfare and health care systems, as well as our energy and investment policies. After all, at the moment, it is having enough trouble collecting the taxes it is owed. But crying socialism demeans McCain and trivializes serious questions about the $750 billion we spend each year on refundable credits and other tax expenditures.