Are Tax Credits Welfare?

NEW YORK (CNNMoney.com) -- Democratic presidential contender Barack Obama says his economic plan would offer a tax break to 95% of working Americans.

John McCain, the Republican nominee, has another name for his rival's plan: government giveaway.

The presidential campaigns are clashing over whether Obama's tax proposal, which would expand the ranks of those who pay no federal income tax but get a refund check, is akin to welfare.

Obama's opponents, calling the proposal another step in his plan to redistribute wealth, are particularly angered that he would pay for the cuts by raising taxes on those earning more than $250,000.

"Barack Obama's plan to raise taxes on some in order to give checks to others is not a tax cut; it's just another government giveaway," McCain said at a New Hampshire rally on Oct. 22.

Obama supporters, however, say that those who would receive the tax breaks do support the government. All the refundable credits have either a work or community service requirement, his advisers say.

"These pay people taxes - payroll taxes, gas taxes, property taxes, sales taxes, airline taxes and many others," said Austan Goolsbee, Obama's senior economic adviser. "They are workers. It is completely offensive to say giving them a tax cut on income taxes is welfare."

Expanding refundable tax credits

At issue is Obama's plan to greatly increase the number of refundable tax credits available to workers, students and homeowners. By making the credits refundable, those who owe no income tax would get money back from the federal government.

The Democratic nominee's "making work pay" credit alone would give $500 to single filers earning less than $75,000 and $1,000 for couples making double that. It will eliminate the federal tax liability for 10 million low-income Americans, according to the campaign.

Obama's other proposals - including expanding the refundable earned income tax credit and making the Child and Dependent Care Tax Credit refundable - would relieve another five million people of their income tax burden, experts said.

The number of people who don't pay federal income tax has grown over the past two decades as the government has added tax incentives for college students, families with children and those saving for retirement, to name a few. Some 47 million filers, or 33%, don't pay taxes, according to the Tax Foundation.

That number would grow by 16 million under the Obama plan, so 44% of filers would have no liability, the group said. Enacting the credits would cost the government more than $1.2 trillion in revenue over 10 years, according to the non-partisan Tax Policy Center.

McCain, for his part, is also proposing a new refundable tax credit that would take 15 million people off the tax rolls, according to the Tax Foundation. His credit could only be used to cover the cost of health insurance premiums. His campaign says it wouldn't cost the government anything.

Overall, Obama's tax package would cost $2.9 trillion, while all of McCain's tax proposals would cost $4.2 trillion, according to the Tax Policy Center.

Raising taxes on the wealthier

The Republicans oppose sending money without restrictions on its use to people who don't pay tax, said Douglas Holtz-Eakin, McCain's senior economic policy adviser. And the GOP doesn't like paying for it by increasing taxes on wealthier Americans, which they say is another example of Obama's ideological drive to redistribute wealth, he said.

"It's pretty clear what's going on here," Holtz-Eakin said.

Also, simply giving lower-income people tax refunds is not the best way to help them or the economy, said Bill Beach, director of the Center for Data Analysis for the Heritage Foundation, a conservative think-tank.

"They want jobs and higher wages," he said. "They don't want checks."

Making tax code fairer

For the most part, the government enacts tax credits to encourage certain behavior. For instance, the Saver's Credit is designed to give low-income workers incentives to fund retirement accounts.

Making tax credits refundable allows lower-income workers to take advantage of them, said Robert Greenstein, executive director of the left-leaning Center on Budget and Policy Priorities. Since many lower-income workers pay little or no tax, a non-refundable credit such as the Saver's Credit isn't much use to them. Obama wants to make the Saver's Credit refundable.

"If you are a millionaire, you get the child care tax credit," he said. "But if you make $20,000, you are denied it because you don't make enough. It ends up going to the least needy."

Obama supporters also take issue with the Republican view that the refundable credits would go to people who pay no tax. Those who don't pay income taxes still support their state and federal governments through payroll taxes for Social Security and Medicare, sales taxes, property taxes and gas taxes.

"Most people pay more in Social Security taxes than in income taxes," said John Irons, research and policy director at the liberal Economic Policy Institute.