Details of tax-credit debate can get lost in the slogans

Calls of 'failed philosophy,' 'socialism'

WASHINGTON - As John McCain's campaign attacks Barack Obama's tax plans as "socialist," the Arizona senator is posing a provocative question at rallies: "How do you cut income taxes for 95 percent of Americans when more than 40 percent pay no income taxes right now?"

The answer explains much about what has become a complicated debate over tax policy in the presidential campaign.

McCain is correct when he says that 40 percent of Americans pay no income taxes, analysts said. But the missing nuance is that many Americans who don't pay income taxes still pay taxes for Social Security and Medicare.

Obama proposes to cut taxes for 95 percent of working Americans (though he sometimes leaves off that "working" qualifier), which means that his plan includes those who are charged payroll taxes but don't earn enough to owe income taxes.

At least 27 million American owe no income tax but do pay the 7.65 percent payroll tax, with another 7.65 percent paid by employers. In addition, more than half of all workers pay more in payroll taxes than in income taxes, according to the nonpartisan Tax Policy Center.

"When Senator McCain calls me a 'socialist' and says I want to give a tax cut to people who don't pay taxes, he knows that's not true. My middle-class tax cuts are for people who work and pay taxes," Obama said in Miami yesterday. "Apparently Senator McCain's decided that if he can't beat our ideas, he'll make up others and run against those."

William Beach, director of the conservative Heritage Foundation's Center for Data Analysis, said that he wouldn't characterize Obama's tax plan as "socialist," calling it a "redistribution of income." But he noted that neither candidate wants to end the progressive tax system under which wealthier people have higher tax rates.

McCain has also complained that Obama wants to give tax cuts to people who pay no income taxes by providing refundable tax credits. McCain is correct that Obama wants to greatly expand the use of such credits. For example, Obama has proposed offsetting the Social Security tax on the first $8,100 of income with a maximum tax credit of $500 for some workers. Obama also has proposed tax credits for education and expanding an existing credit for lower-income workers.

The McCain campaign calls such credits "welfare" because it could mean the government sends checks to people who owe no income taxes.

McCain, asked Sunday on Fox News Channel, whether he thought Obama was a "socialist," said that Obama's tax plan matches "one of the tenets of socialism" because Obama has said he wants to "spread the wealth around."

Yesterday, McCain's running mate, Sarah Palin, repeated the assertion in stronger terms, telling a rally in Nevada, "Now is not the time to experiment with socialism."

Democrats have responded by noting that McCain also supports some tax credits that could go to people who don't pay income taxes. For example, McCain's campaign website says that under his healthcare plan "every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance."

McCain has said his tax plan is focused on "wealth creation," a reference to McCain's support for extending all of the Bush administration's income tax cuts. Obama wants to extend them only to individuals earning less than $200,000 and families earning less than $250,000.

Campaigning in Florida yesterday, Obama ridiculed McCain's tax cut plan, calling it a "failed philosophy" that gives "more to those with the most and hope prosperity trickles down to everyone else."

Until recently, most of the focus on the two competing tax plans has been on Obama's opposition to tax cuts for those at top income levels. But the McCain campaign's charge that the Obama plan creates a new level of "welfare" has put new emphasis on Obama's tax measures geared for lower-income workers.

Currently, lower-income workers can receive the Earned Income Tax Credit, which is paid to workers regardless of whether they make enough to pay income taxes. The credit has long had bipartisan support because it is viewed as encouraging people to go to work, but some conservatives have argued that Obama's effort to expand the credit goes too far. Now, a family of four earning $24,000 a year gets a tax credit of $3,716. That would go up by $421 under Obama's plan, said Roberton Williams of the Tax Policy Center.