The 95% "myth"

Well, sort of. For the 33% of Americans who currently pay no income tax, what they'll be getting are various expanded tax credits. E.g. $4,000 more/year for college -- things like that.

Obama has apparently been calling this a "tax cut", but I'm sure I've also heard him say things like "95% of you will pay less". The later is true in the sense that marginal rates will be lower.

It sounds a lot better than actually saying "your marginal rates will be lower". I think we can forgive a politician for using language voters understand in speeches and debates (if you want wonkish detail, that's what websites are for).

What bothers me most is raised in the the last part of the article:

Because Mr. Obama's tax credits are phased out as incomes rise, they impose a huge "marginal" tax rate increase on low-income workers. The marginal tax rate refers to the rate on the next dollar of income earned. As the nearby chart illustrates, the marginal rate for millions of low- and middle-income workers would spike as they earn more income.

Some families with an income of $40,000 could lose up to 40 cents in vanishing credits for every additional dollar earned from working overtime or taking a new job. As public policy, this is contradictory. The tax credits are sold in the name of "making work pay," but in practice they can be a disincentive to working harder, especially if you're a lower-income couple getting raises of $1,000 or $2,000 a year. One mystery -- among many -- of the McCain campaign is why it has allowed Mr. Obama's 95% illusion to go unanswered.

Indeed, I think diminishing returns is the worst thing about our current tax system. The more you make the more you're taxed, which takes away part of the incentive to make more.

The best idea I've come across to try and do away with this is Milton Friedman's negative income flat tax.