On One Hand

September 12, 2008

The Obama Tax Cut

Filed under: Uncategorized — ononehand @ 11:24 pm



    Just wanted to add in some economic commentary:

    First, I’d like to acknowledge that this, in my opinion, was better than what you hear from most politicians on the economy. There was slightly less pandering/populism than normal. And, no anti-trade rhetoric, which is usually the most distorted economic argument commonly heard.

    But, still, it is frustrating to hear this because at some level I suspect that Obama knows better about some of the comments he makes. Saying the last administration “ran the economy into the ground” is always a political statement. It suggests an unreal connection between our government and the economy and exaggerates the economic conditions that most people experience. The most dramatic economic turmoil we’ve seen has very little connection to partisan politics – neither Republicans nor Democrats could have done much to prevent the current financial derivative debacle.

    But, on a more substantive note: here are some issues that Obama left unsaid:

    1) Marginal tax rates would increase under Obama due to the fact that his tax rate cuts are targetted in ranges. The size of his tax cuts diminishes as household incomes increase. Why does this matter? Because it has an effect on the incentive to earn more income, i.e. be more productive. (This does negate the fact that Obama’s plan would still cause average tax rates and payments to fall. It just means that we get a more complex tax system with some questional incentive issues.)

    See this graph to get a better picture of what I’m talking about:

    2) In the near future, the top income tax bracket is going to get hit hard:

    Quoting Bob Caroll from the Tax foundation:

    “Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises…from 37.9 percent to roughly 48 to 50 percent. “High” is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986.”

    3) We will absolutely get some different tax arrangements under the next administration, but nothing will be how it is currently being presented. Here is the most fundamental issue:

    “It’s arithmetic.” Federal revenue today is 18.8 percent of GDP and federal spending is 20 percent. Holtz-Eakin observes that “the pressure are there” to lift spending [on entitlement programs, mostly] and taxes to 23 or 24 percent of GDP by around 2020, and to as much as 27 percent if health costs remain out of control.”

    Oddly, that honest assessment was summed up by Douglas Holtz-Eakin, former Director of the Congressional Budget Office and, full disclosure, an advisor to McCain.

    Annually, this means a tax increase around 600 billion annually. This is way outside the range of any spending cuts that McCain or Obama has proposed. And, no amoung of closing loop holes or taxing the rich is going to finish clearning up that arithmetic.

    What does all this mean? We’re not going to get exactly what Obama is promising (nor for that matter what McCain promises). And, all the rhetoric about “getting the economy back on track” misses the point. Things won’t go off the rails anytime soon, but we are going to see relatively poor economic conditions through 2009, the first year of the new administration. Policy changes will not erase the current financial market turmoil that’s dragging the economy into strange places (no wage growth, rising unemployment matched by less-than-bad output growth).

    Comment by sleepyreaderz — September 14, 2008 @ 5:48 am | Reply

    • Re: Comments

      I’m highly skeptical of the “incentive” argument when it comes to taxes and wealth. The idea that people will no longer want to be successful because they are taxed at a higher rate when they are successful doesn’t pass the laugh test for me; I’ve never seen a single idealistic college student say that he or she is assuaged from a lucrative career interest (one where the money is a big reason to go into that field) because of taxes at that level.

      In any case, the actual rate of people making more than 250K a year is so small that it would hardly impact the workforce as a whole even if it somehow proved to be a strong disincentive from work. Somebody making 50K a year is still going to desire 100K a year – where the income tax rates are not that dissimilar – and the bulk of American productivity comes from people in that range. The bulk of upward economic mobility comes from people in that range as well.

      In fact, whereas there may be a strong relationship between effort, productivity and income at the main ranges where most Americans exist, I would say the numbers rapidly diverge when they approach or exceed the 200K per year range. Does a principal of a large high school (earning in the 150K range) work harder and do more good for society than the school janitor (earning in the 30k range)? Probably yes. Is Does he or she do five times or more good as the janitor? Probably yes, too – or at least to a degree that I’m not going to complain about high school principal salaries compared to the janitor salaries. But that system breaks down at higher rates. Does a professional baseball player work harder and produce more than a high school principal? That’s debatable – but is it 100 times more productivity, as indicated by salary? Absolutely not.

      This isn’t an argument for some kind of income redistribution, or federally mandated salary caps, or anything one might accuse of being “socialist.” But what it is an argument for is that a progressive tax system that shifts burden to those at such high ranges is not patently “unfair” as argued by economic conservatives – nor is it going to significantly impact the desire of individuals to work and better themselves, nor is it going to significantly impact people seeing the fruits of their labor.

      If a decreased tax burden is likely to lead to upward mobility, as conservatives argue, then the only thing this indicates is that we should decrease the tax burden on people making less than 250K (or so) a year paid for by increasing taxes on those making more. MOST people are in the less-than-250K range, and most federal income comes from that range as well. Allowing a million people earning 60,000 a year to rise to incomes of 100,000 a year is going to help the federal budget more than encouraging 100 people making 1 million a year to start earning 3 million.

      Comment by ononehand — September 14, 2008 @ 6:17 am | Reply

      • Re: Comments

        Right, the incentive argument made above was not about incentives for anyone in the top 10% of income. If you look at the graph it shows that the marginal tax rates are higher for the bottom 5th of the distribution. That’s where the issue is…

        Here’s a concrete example from Jeff Liebman at Harvard:

        “The poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.”

        The main point is the last sentence. By moving up in the income bracket, she actually has less income – her effective marginal tax rates (which take into account govt subsidies).

        Comment by sleepyreaderz — September 15, 2008 @ 2:50 am

      • Re: Comments

        So, the incentive argument here is about what happens to incentives for people at the bottom of the distribution. Not the top.

        Comment by sleepyreaderz — September 15, 2008 @ 2:51 am

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