August 22, 2008
Obama Tax Relief Proposal for Seniors Impossible to Implement
Washington, DC, August 22, 2008 - An economic analysis of Barack Obama's tax relief plan for senior citizens finds that it would create an "income tax cliff" that would be excessive and unfair to many over 65.
In Tax Foundation Fiscal Fact No. 140, "Obama's Income Tax Cliff for Senior Citizens," Tax Foundation analyst Mark Robyn examines the presumptive Democratic presidential nominee's pitch to eliminate all income taxation for senior citizens making less than $50,000 per year, and finds that Obama's plan does not address the question of what happens when income crosses above that threshold.
Robyn illustrates this problem by providing a scenario where a husband and wife who are both seniors that earn a combined income of $49,500, but receive an extra $500 by selling their coin collection. Since only those making less than $50,000 are exempt, the couple might think they only owe a few cents on the $1 of excess income; instead that couple is hit with a total tax liability of $3,585. Their after tax income would be $46,415, making their extra $500 in income turning into a net loss of over $3000.
"The reason this happens is that Obama's plan, as stated in his official campaign publications, throws taxpayers directly into the 15% bracket as soon as they cross the $50,000 threshold, making them fully liable for income tax on all of their taxable income," explains Robyn. "In this way, the policy acts as a ‘cliff,' suddenly slamming the taxpayer with a substantial tax bill and reducing his after-tax income well below what it would have been if his income had never increased."
Robyn further notes that while the fifty-thousandth dollar by itself is taxed at 15%, the effective marginal tax rate is 385,000%, which is a ratio of the change in taxes versus the change in income. However, this problem can be easily fixed.
"Usually any new tax benefit like the one Obama is proposing includes a phase-in," says Robyn. "Why Obama does not include a phase-in is not clear. It seems that the Obama campaign has not really thought through this issue since it is almost impossible that a plan like this would ever be implemented in its current form. The plan he has outlined sounds good politically but is ultimately imprecise and illogical."
Robyn points out other problems with Obama's senior exemption plan. There is no distinction between married and single filers, which means married filers, who are likely to claim more income on their return than single seniors, are more likely to be hit with the income tax "cliff." Furthermore, the $50,000 threshold is not indexed to inflation, which means that the value of the exemption will erode over time.
"There are other, simpler ways Obama could accomplish his goal of reducing the tax burden of low-income seniors," Robyn notes. "He could increase the standard deduction for seniors to around $43,000 for couples and $46,500 for singles to achieve the same effect. It would only change one line on the 1040 that handles the standard deduction, and there would be no need for a complicated phase-in."
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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To set up an interview to discuss Sen. Barack Obama's tax relief plan for senior citizens or more parts of any candidates' tax policies, please contact Matt Moon, the Tax Foundation's Manager of Media Relations, at (202) 464-5102.
