McCain is right in asking: "How do you cut income taxes for 95% of Americans when more than 40% pay no income taxes right now?"
Barack Obama's tax plan [that] would give tax cuts to people who currently pay no income taxes . . . [is known in tax parlance as a "refundable tax credit," and such proposals] have become increasingly common in recent years, supported by both parties. Sen. McCain himself uses them as the cornerstone of his health-care plan.
"Traditional welfare is frowned upon by the public, and government spending is similarly frowned upon," said Scott Hodge, president of the Tax Foundation, a nonpartisan research group in Washington. "So politicians are looking at new ways to deliver targeted benefits ... and by delivering it through the IRS, it sounds far more palatable to the public."
Refundable tax credits have become increasingly popular over the past two decades, as a series of tax breaks have allowed more households to eliminate their income-tax liability altogether. President Bill Clinton's welfare overhaul relied on expanding the earned-income tax credit, which is for low-income working individuals and families and is designed to provide an incentive to work. President George W. Bush's 2001 tax cuts increased an existing child tax credit, and made it refundable so households that didn't pay taxes could receive it.
Currently, 62% of households pay income taxes, down from 82% in 1984. Some 57 million tax filers don't pay any federal income taxes, according to the Tax Policy Center, a nonpartisan Washington think tank.
Sen. Obama, who says he wants to give 95% of all households tax relief, makes his case by saying that he is offering most Americans tax relief. His plan counts on raising taxes on individuals earning more than $200,000 a year and families who make more than $250,000 a year.
The senator from Illinois has proposed a series of refundable tax credits, including a $500 refund to low- and middle-income workers to offset Social Security payroll taxes; a $4,000 tax credit for college students paying tuition and performing community service, regardless of whether they pay income taxes; and a tax credit covering 50% of child-care expenses up to $6,000 a year. The plan also offers a refundable 10% mortgage-interest tax credit for taxpayers who don't itemize their deductions, and an expansion of the earned-income tax credit that would give single workers as much as $555 annually, up from $175 currently.
From The Wall Street Journal:
Barack Obama's advisers, responding to criticism by Republican nominee John McCain that the Democratic candidate's tax plan is equivalent to "welfare," clarified that his proposed tax credits would require beneficiaries to be employed or to have been recently employed.
A McCain adviser, meanwhile, retreated from a pledge by the Arizona senator that his administration would balance the budget in four years.