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Looking outside the income tax system

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David Frum: If politicians are talking about tax relief, we must be getting close to primary season.

Presidential candidate Barack Obama just unveiled his plan to lower taxes. He would get rid of income tax all together for seniors making less than $50,000 a year. Commentator David Frum says proposals like that are going about things the wrong way.

David Frum: Lower-income Americans are economically hard-pressed. Politicians naturally want to help them, but promising tax relief to those who pay little in income tax does virtually nothing to help their cause.

Almost 30 million income-earning Americans pay already no income taxes at all. If you are at zero, we cannot cut your taxes any more. Getting serious about helping lower-income Americans means looking outside the income tax system for solutions. But where?

How about the payroll tax? In the United States, the top 5 percent of income earners pay an absolute majority of all income taxes. By contrast, 80 percent of Americans pay less in income taxes than they do in payroll taxes.

Those Americans get no benefit from child tax credits or other deductions. The payroll tax starts at the first dollar and knows no exemptions.

Or a progressive Democrat might propose to cut tariffs. Economist Edward Gresser estimates that tariffs cost a typical single-parent family about $400 per year, much more than they pay in income tax. Tariffs are taxes too, why not cut those?

Finally, a really bold progressive Democrat might propose to treat health benefits as income — which they surely are — tax them, and use the money to expand health benefits for the poor. The non-taxation of health benefits is the second-biggest tax expenditure in the United States, and the vast bulk of the benefit goes to upper-income earners with generous plans.

The American poor do face severe challenges in the modern globalized
economy. But over-taxation is not one of them. To offer sincere solutions to lower-income wage earners, we need to address real problems.

Jagow: David Frum is a former speechwriter for President Bush. He’s now a resident scholar at the American Enterprise Institute.

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