Obama’s Pandering to Seniors

“Many seniors are struggling to keep pace with costs,” Senator Obama told a largely senior audience in Florida on September 18. Social Security benefits are adjusted for rising prices but not for rising taxes, including increased fees for Medicare. Using a line from his tax plan, Obama said, “This strain has been greater since 1993, when taxes on social security benefits were raised. Millions of seniors saw their net benefits go down.”

Thanks to Bill Clinton’s 1993 tax law, single seniors with incomes above $40,048 in 2007 had to pay income tax on 85% of a portion of their benefits, and those with income above $46,850 had to pay tax on 85% of their entire benefits. That 1993 tax increase hits couples with incomes above $54,278.

In retirement communities in key states like Florida and Arizona, Obama has cleverly tapped into senior resentment about the Clinton era, when “millions of seniors saw their net benefits go down.” But then he pulls a bait and switch trick.

Clinton’s 1993 tax hike reduced after-tax benefits for seniors earning more than $50,000—because they continued working after age 65 and/or because they saved for retirement.

Obama proposes to fix that by eliminating income tax for seniors earning less than $50,000. He says, “When I’m President, we’ll work to see that no retiree making less than $50,000 each year has to pay income tax. This will eliminate income taxes for about 7 million Americans, at a savings rate of roughly $1,400 each year. And 22 million seniors won’t even have to file a return and hire an expensive tax preparer.”

If Sally is 60 years old earns $49,000 by working, she would pay a higher income (and payroll) tax than Sam who is 66 and makes $49,000 from retirement income. Is there any rational explanation for that other than a shameless attempt to buy senior votes?

To help pay for such arbitrary tax favoritism, Obama wants to increase the tax rates on capital gains and dividends—two taxes that hit frugal seniors much harder than young people.

As I wrote in my Hillsdale College paper, “The argument for Obama’s tax plans is expressed in terms of fairness, rather than the impact on incentives and economic performance, yet the implied concept of fairness remains ambiguous. A single senior with a retirement income of $50,000 has the same per capita income as a two-earner family with $250,000 and three children. Yet the retired senior would be exempt from income tax, under this plan, while the large working family would be required to pay federal and state taxes of up to 46% on their next dollar of income while losing valuable deductions (e.g., for state income taxes and mortgage interest) and also losing five personal exemptions (which were supposed to be partial compensation for the added expense of supporting a larger family). The fairness of such a reallocation of tax burdens is, to put it mildly, not self-evident.”