Make Work Pay?

14 10 2008

Big feature of Obama’s economic plan are refundable tax credits. Refundable meaning that you will get them even if you do not pay taxes. Which makes them more like welfare than tax credits. One of the credits is called “Make Work Pay”. But do these refundable tax credits really make work pay?

Refundable tax credits phase out with increasing income, effectively resulting in increasing the marginal tax rate. Below is a diagram showing the effective marginal tax rate under Obama’s plan.

Now, the effect of high marginal tax rates is less incentive to work harder to increase your salary. If you get a raise of 500 per year and 1/3 of it goes to Federal taxes then you will see only very little of it on your paycheck, especially if you also have to pay state taxes.

If future tax changes under Obama’s rule continue to reflect the same thinking, we will eventually end up with Western Europe Socialism. Here is an example of what I mean:

I have relatives in Germany. They are of German descent and emigrated to Germany from Eastern Europe 20 years ago. Immediately, they got cozy with the German welfare system. It gave them an apartment and enough money to live half-way decently. Of course, they wanted more, but did not want to lose welfare, so they work “illegally”, i.e. without reporting it to the authorities. This way they got to keep their welfare checks, the apartment, and all the extra money that they earned. After a while they figured out that they would have more money if they were on unemployment rather than welfare. They were smart enough so they easily could get jobs, but they would get them for just 3 months and then get fired, so that they would be able to collect maximum unemployment. They had to repeat this from time to time, because unemployment would phase out after a while. Car companies around Cologne were happy with such an arrangement because they liked to hire workers for so called trial period and then fire them before the trial period was over. Anyway, after a while they made enough money working this way that they could buy a second apartment on the sea coast — the first apartment did not cost them anything.

Compare this to my brother who lived in the same city, but had normal job as a driver working 5am to 5pm, paid for his own apartment and paid taxes, of which part went to our shrewd relative.

Once, before elections in Germany, we asked them who they were going to vote for (my brother was voting for CDU). They answered “SPD”, which is the Socialist-Democratic Party of Germany. They said: “SPD will give us money“.

So here is the future that awaits us. Let’s get ready to “spread the wealth around”.

Poverty for All

Poverty for All

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