Obama’s flawed fiscal plan

After spending his first two and a half years in the Senate blasting the Bush administration for its irresponsible budget policies, Sen. Barack Obama has been busy devising his own fiscal train wreck. First came the low-ball estimate for his universal health-insurance proposal, the annual cost he calculated to be between $50 billion and $65 billion. Mr. Obama said he could pay for his plan by reinstating Clinton-era income-tax rates (20 percent on capital gains and 39.6 percent on salary and dividend income) on those earning more than $250,000 a year.

Now Mr. Obama has offered his middle-class tax-cut plan, which will cost another $80 billion to $85 billion per year. Unspecified revenues from other sources have mysteriously materialized since Mr. Obama unveiled his health proposal in May. Now he claims he can devote much of the anticipated revenue from hiking the capital-gains and dividend tax rates for the wealthy to his middle-class tax cut. Worth noting is that today a two-parent family with two children pays no income tax on the first $42,850 of income. So, much of Mr. Obama’s “tax cut” will take the form of refundable tax credits. That means the U.S. Treasury will be writing large checks to people who already pay no income taxes.

With the Social Security crisis heating up in 2008 (when baby boomers first become eligible) and with the more ominous Medicare crisis intensifying in 2011 (when baby boomers begin to enroll), Mr. Obama’s plan would effectively slash the revenue from the payroll taxes that finance these programs. He is offering a refundable income tax cut of $500 per person and $1,000 per family “to offset the payroll tax that they are already paying.”

Because “only a third of homeowners take advantage” of the mortgage-interest tax deduction by itemizing their tax returns, Mr. Obama apparently believes that only itemizers benefit from the mortgage-interest deduction. In fact, taxpayers have two options. They can itemize their deductions or they can take the standard deduction, which is $10,700 for married couples filing jointly. People who take the standard deduction do so because it exceeds the total of their itemized deductions, including mortgage interest. His plan would allow those who take the standard deduction to also take a refundable tax credit equal to 10 percent of mortgage-interest payments. This refundable credit would total $1,300 for a $200,000 mortgage (the average sales price of existing homes is $270,000) with a 6.5 interest rate.

Mr. Obama’s middle-class tax proposal offers no relief for the alternative minimum tax, which threatens to cost taxpayers (most of whom are in the middle- and upper-middle-class ranges) more than $1 trillion over the next 10 years. Yet he clearly intends to cancel those pending tax increases, although his plan fails to provide a dime toward that end.

Mr. Obama’s fiscal policy doesn’t add up.