Obama's 'no income taxes on seniors' draws critics

[August 12, 2008]  WASHINGTON (AP) -- If you're a senior citizen and make less than $50,000 a year, Barack Obama has a deal for you: the rest of your life free of federal income tax.

Sounds appealing, right? Maybe to many seniors. But tax policy experts in Washington are giving it bad reviews. They see it as another subsidy for senior citizens, who already get federal help through Social Security and Medicare and often have economic advantages over other demographic groups.

Seniors typically have paid off their mortgages. Many have investments and usually don't pay taxes on their Social Security benefits. The kids are usually grown, so they're not saddled with day care or college costs.

"The odds are the retired folks -- they're getting pensions, they're getting Social Security, they have investment assets, they own a house -- so ... they're better off than somebody who is 30 or 40 years younger who's trying to buy a house (and) trying to start saving," said Clint Stretch, managing principal of tax policy for Deloitte Tax.

The Obama campaign says the idea would give tax cuts averaging $1,400 to 7 million seniors who are battling inflation with mostly fixed incomes. The campaign also says the plan would relieve millions of older people from having to file complicated tax returns.

"If you work hard and pay into the system, you've earned the right to a secure retirement," says a description of the plan on the Obama campaign's Web site. "But too many seniors aren't getting that security, even though they've held up their end of the bargain. Lower- and middle-income seniors are struggling as their expenses on health and energy skyrocket while their incomes do not keep pace."

Some of Obama's allies in Washington think he's onto a bad idea.

"Most low- and moderate-income seniors already owe no income tax. Among seniors with incomes below $50,000 who do owe income tax, a significant number have modest incomes because they are retired but possess substantial assets," said Robert Greenstein, who heads the Center on Budget and Policy Priorities, a liberal think tank. "Given all the problems and needs the nation faces, targeting relief to this group isn't a priority."

The Tax Policy Center, a think tank run jointly by the Brookings Institution and the Urban Institute, gave the idea bad grades in a recent study of the two presidential candidates' tax plans.

Seniors already get preferential treatment in the tax code. They get to claim an additional standard deduction and only a portion of their Social Security benefits are taxed. Many don't pay payroll taxes because their income is from investments rather than wages.

"The proposal would exempt comparatively well off, though not affluent, senior citizens from tax and give them a benefit not generally available to working Americans," said the Tax Policy Center paper. It "helps only those low-income seniors who currently pay income taxes. Those too poor to owe any tax -- arguably those most in need -- would get no benefit."

Even the powerful seniors' lobby AARP doesn't seem excited about Obama's idea. An AARP bulletin on the presidential candidates' tax plans barely mentions it, saying that Obama's proposal could partly offset additional taxes that Obama would impose on seniors through higher tax rates on dividends and capital gains.

Tax experts across the political spectrum also fault the Obama plan's abrupt $50,000-a-year threshold. As described by the campaign, seniors making, say, $48,000 would pay no income tax, while someone with income slightly more than $50,000 could pay several thousand dollars in income taxes. Seniors nearing the $50,000 threshold would have incentive to quit working.

Congress likely would add a phaseout, according to tax experts. "Everyone knows there would never be this $50,000 cliff," said Ben Harris, a senior research associate at Brookings.

The proposed new tax break for seniors is one of about a dozen tax changes proposed by Obama, including raising rates on people making more than $250,000 a year; extending most of the rest of President Bush's tax cuts; subsidizing Social Security and payroll taxes for low-income workers; and boosting income and child care tax credits for low-income workers.

[Associated Press; By ANDREW TAYLOR]

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