I have my reasons for supporting Obama--a thorough understanding of his tax policy, and the field of economics at large, isn't one of them. That's embarrassing to admit. I'm saying this because I think each candidates tax plan is one of those issues that actually matter, but a lot of us Americans don't quite grasp. I guess that's the difference between being an actual Ivy Leaguer and a guy who gets mistaken for one because he blogs here at the Atlantic.
Oh well. Knowledge is power. I'm all up for getting as much as I can. So consider this an open thread. I want to hear from folks who've really thought about the pluses and minuses of both plans and what they'd mean for the economy. Go for it.
The Beautiful Struggle: A Father, Two Sons, and an Unlikely Road to Manhood 
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
a thorough understanding of his tax policy, and the field of economics at large, isn't one of them. That's embarrassing to admit.
It's not that embarrassing. Nobody understands economics because there's nothing there to understand. (You only have to watch Megan McArdle try to reason "economically" to see that.) Like theology, the field of economics exists to implement ideology, not to study reality.
It's part of the reason there's not actually a Nobel Prize in Economics.
What do you want to know about the policies? There's a lot that could be said, but I'll just mention a couple major points of some interest:
1) McCain's will result in less revenue, and almost certainly much higher deficits. The knock-on effects from this could result in a substantial weakening of our currency, increased inflation from more expensive imports, and then higher future taxation levels to deal with the ballooning debt.
2) A more interesting point is that since Obama's tax plan focuses on direct tax cuts for the poor while McCain's focuses on the rich, Obama's plan may deliver more near-term economic stimulus even though it puts less total money back into consumer's pockets. Basically, what matters for economic stimulus in the near-term is two things: how much is being produced and how much money is moving around to encourage more production. Rich people who get money at tax time are much more likely to save it, which contributes little to the economy now (there are some positive effects from saving in terms of capital that can be purchased, but that's a longer-term story) and instead just secures that rich person a bigger share of future production. Poorer people, on the other hand, usually will spend that money on food or something useful right away, which provides a bigger fast positive shock to the economy. This is why the CBO suggests higher food stamp and unemployment payments as the ideal system for delivering stimulus payments in an economic downturn.
There's huge amounts more to be said regarding McCain's lowering of the corporate tax rate, who tends to pay corporate taxes in the long-run, what the effects of some of Obama's proposed means-tested benefits are, and so forth. Let me know if there's anything in particular you're interested about.
Both of their tax plans are for show and only small elements will make it into legislation. Charles Rangel heads (and will continue to head) the House Ways & Means Committee where all tax legislation arises and he has very specific reforms in mind. If you think he will bow to some wet-behind-the-ears bag of wind or a stodgy old fart, you don’t pay attention to politics. Rangel will give a little, but its his tax plan andhe won’t get knocked off it. McCain’s tax cuts won’t go through and Obama won’t get that 60% tax rate he wants.
On the economic front, the president has little to say. They offer the first draft of a federal government budget and then horse-trade with Congress. .
So your ignorance on their respective tax and economic policies is a rational position, because its all fluff. Instead of spread sheeting their various proposals, its better to vote on the guy who you think has values or organizing principles that you generally have.
2 of Obama's economic advisors, who are well-regarded, summarized Obama's plan for the WSJ.
http://online.wsj.com/article/SB121867201724238901.html
It's a really sharp place too start, in fact an essential place to start, though a little too wonkish for a political campaign (but I think that's on purpose).
Basically, while there is some controversy over which baseline to judge each proposed policy against, Obama is proposing a slight increase in tax rates for the top income brackets. The proposed increase is fairly modest by historical standards of the past twenty years. Other income brackets will see a tax decrease.
MCain on the other hand proposes across the board tax cuts.
One fair criticism of Obama's plan is that raises marginal tax rates fairly significantly. Marginal meaning the amount of tax paid on each additional dollar earned. By itself this reduces the incentive to work more, and on a macro scale this could impact growth.
Running large deficits in the long term is fairly unhealthy for the economy (For many reasons I won't even attempt to explain). So Obama's plan from this perspective is more macro-economically responsible.
So (equity considerations aside) which plan is better economically depends on which issue/affect you believe is more significant.
Greg Mankiw really worries about marginal tax rates.
Brad Delong really worries about large deficits.
Side note,
While Alfred Nobel didn't specify a prize for economics one was instituted later by a grant from a Sweedish bank that follows the same guidelines as other Nobel prizes. There's also no Nobel Prize for Mathematics.
What I don't get is why supply siders aren't a bit more chagrined given our recent economic woes. Isn't the idea that tax rates for the rich should be kept low because their investment decisions tend to be better than the government's belied by Wall Street's rampant trading in collateralized debt obligations and other investment vehicle boondoggles? Aren't these the kinds of products investors buy into when they have more money than there are actual economy-building investment opportunities?
I'm no economist, but it seems that the average american will benefit greater from Obama's plan than McCain's. Not too many people I know deal with capital gains or estates in excess of 3.5/5 million. Both of these areas McCain wants to decrease while Obama wants to increase the tax.
Suspending the federal gas tax looks like an invitation for the gas companies to slightly raise their prices to make even more profit than they are getting now.
Only good thing I see from McCains plan is the cell phone/internet tax. Would be cool, but what's the point? It's not like the current tax prevents people from having cell phones and internet, seems more for convenience than for aid. It's like "yea, i'm gonna make it so I pay less taxes and to make you guys feel better about it i'll get rid of those annoying cell phone and internet taxes."
I am not a big fan of taxation, but it is necessary and unlike quite a few conservatives, I believe in the progressive tax system. Obama's increases on the income classes he targeted are less than I thought, especially on capital gains and dividends. Much of his hikes will hit the upper class and would have cuts or rebates for those at the lower end, including those who pay no taxes.
Both plans are overly generous towards those with children, which is a way to sell tax plans as being for the kids. What I don't like about Obama's plan is that it raises the rate on income at the high end to a level that is a bit too high for my liking. I like that it restores a bit of balance between capital gains rates vs ordinary income.
For McCain, I liked his 2000 plan better, which called for increasing the tax brackets at the lower and middle rates, rather than his current day endorsment of the status quo. I prefer McCain's corporate policies of lowering the tax rate for corps, if and only if there is a corresponding large reduction in corporate tax credits(aka corporate welfare). Other industrial countries have been cutting their corporate rates, so I think we need to adjust our system.
From a practical standpoint, I think Obama's deserves more attention since if McCain is elected, Democrats in Congress aren't going to enact his plan.
To bab23: No, those instruments don't actually increase the amount of investable assets in the economy. They only try to slice those assets up in different ways in order to allow people to only take the low-risk part or the medium-risk or the high-risk part of the investment.
But the slicing was done poorly, and there were big problems with the assets that were fed into the new investments in the first place for a rather large variety of reasons too numerous to get into here.
However, supply-siders who think that the economy grows much more quickly and will produce higher tax revenue if rates are cut should be ashamed, if only because no reputable economist (and this includes all the Republican ones) agrees with their delusion.
"One fair criticism of Obama's plan is that raises marginal tax rates fairly significantly. Marginal meaning the amount of tax paid on each additional dollar earned. By itself this reduces the incentive to work more, and on a macro scale this could impact growth. "
^^This isn't just theory folks.
Time and a half sounds great, because you imagine what you'll do with the extra money
But typically the overtime bump is undercut by taxes. Throw in being tired and missing friends and family - it will make it not seem worth it.
While Alfred Nobel didn't specify a prize for economics one was instituted later by a grant from a Sweedish bank that follows the same guidelines as other Nobel prizes.
I could give out an award for the best air guitar playing that year, and even call it the "Prize for Best Air Guitaring Awarded in Memory of Alfred Nobel", but that doesn't make any more of a Nobel Prize than the Swedish economics award is.
Also - how come nobody ever mentions that John McCain's tax policy lowers his own taxes? Isn't that kind of dirty pool? Shouldn't at least some scrutiny be paid to how much money McCain stands to save under his own policies?
When the other candidate is McCain, any time spent studying Obama's policy thinking to determine whether he's a better choice is wasted time, unless you're the proverbial Observer from Mars.
Also to bear in mind:
The objections people have to the changes in the marginal tax rate caused by Obama's tax plan come almost entirely from this analysis by a couple people at the American Enterprise Institute, a very right-wing think tank.
The marginal tax rate graph shown in that article, and the one they're using to make their points, is based upon a family of four with one college-age kid and a 12-year-old in after-school care. That's entirely so that they can cherry-pick two tax breaks given by the Obama tax plan to add to the marginal tax rates:
1) A young-child dependent care credit that phases out from $40k to $58k in income, that Obama's plan would set at a far higher value than it currently does.
2) A college-tuition credit which Obama also plans to substantially increase while keeping the phase-out between $100k and $120k in income.
These are two major tax breaks that are being counted against Obama because, due to the phase-outs, they increase marginal rates over certain income intervals. Nevermind that the overall tax rate is decreasing for many people or that most other Americans will not see these marginal rate effects since they do not have the perfect 4-person family to experience them.
Also, I'd always question marginal effects at the $100k-$120k level, since those are frequently salaried workers who can't directly affect their pay through working more hours. For such workers, marginal analysis is a much blunter instrument, and these changes in marginal rates are almost second-order effects on after-tax income relative to how well their business happens to do that year or how much their boss likes them.
Po-Mo- What do you call Obama's plans for "refundable tax credits?" I call them welfare payments, but, hey, maybe I'm mistaken.
And then there are his plans to increase the payroll taxes (social security taxes) paid by people with family income over $250K. The result of that will be that those people will receive less out of social security than they pay into it. Now I don't really have a problem with turning social security into a pure welfare (i.e., transfer payments) program for poor old people. That would be a lot more honest than what we do today. But let's be upfront about it. While we're at it, I would suggest doing away with payroll taxes altogether and having a single flat rate income tax with no credits or deductions of any kind. That way everyone is in the same boat, everyone bears the burden of cheerleading for more government programs. Not to mention that eliminating payroll taxes would stimulate employment. We should also eliminate the "entitlement" aspect of old age welfare payments and make them subject to annual appropriations just like every other government program.
jeez, po-mo polymath, you spoil all the fun by getting all the right answers before i've even read the questions.
so let me just say to WestIndianArchie that marginal rates would have to be enormously higher before people started turning down time-and-a-half on account of the marginal tax bite....
as for ta-nehisi and knowledge, you might want to regularly check out such blogs as brad delong, economist's view, calculated risk (primarly focussed on housing), naked capitalism, angry bear, and the big picture.
It's quite simple - Obama believes that the highly successful should fork over even more of their money so it can be redistributed to those further down the ladder. Apparently the fact that the top 10% of taxpayers cough up over 70% of all income taxes isn't enough to satisfy him or other liberals that believe government has a stronger claim on folks' income than the people that actually went out and earned it.
This is actually quite stupid because although it's popular to promote resentment of the rich or successful (like saying stuff that they 'need to pay their fair share') it's sort of killing the golden goose. Those that take enormous financial risks or build up innovative and beneficial businesses provide the majority of the country's economic activity, including more jobs. So soaking them (or successful companies) for government's own ends only succeeds in taking more capital out of the far more efficient private economy and putting it into government programs with very high transaction costs and low returns.
Take higher capital gains for example - a person takes money that probably was already taxed once and invests it. Either they pick poorly and lose some of the money, or they pick wisely (and in the process help grow the economy) and then get to pay a penalty for that smart choice when they want to make good on their gain. Mr. Obama wants to up the pain for good investment decisions which means that less of that capital gain is available for an investor to put back into the economy.
This is not smart economics...McCain doesn't promote anything revolutionary or interesting (and the gas tax thing is just a pander) but he's less harmful to the economy.
They both have really crappy plans, in that they will increase the feature which is the real bane of the current tax code, complexity, which promotes all manner of inefficient and nonproductive activity. Of course, the criminal class which attends sessions in the building with the big white dome near the Potomoc depends on tax code complexity to make their shake-down racket easier to operate, so whomever is elected, you can be sure that the capos will do everything they can to add complexity to the new President's plan.
If Congress and the President really wanted to make the country better, they would spend a week re-passing the 1986 tax bill, the only tax legislation written since WWII that had any value, and cutting spending, including entitlements and DOD, by about 500 billion dollars.
Either they pick poorly and lose some of the money
Or they pick so poorly, as in the case of right now, that they threaten to bring down the entire financial system of the US and end up being bailed out to the tune of hundreds of billions of dollars. Or they figure out a way to structure their income as a "capital gain" so they pay lower taxes.
Besides, the 20% capital tax rate of the 90's and the 28% capital tax rate of the 80's didn't seem to grind the US economy to a halt. Now that the capital tax rate is all the way down to 15%, it's too high and needs to be dropped further? All so that the extremely wealthy can make an extra few percent?
DBL: If you mean "welfare" to include anything redistributional, then yes. Refundable tax credits are meant to be redistributional insofar as they encourage behaviors that are helpful such as buying health insurance, sending kids to daycare to allow parents to stay working, and sending kids to college to increase the education level of our workforce.
Arclight: JordanT basically has this on preview, but since I've put so much effort into this:
Capital gains rates were lowered substantially by Bush, I'm quite sure (though not positive, I'll admit) that Obama's proposed tax changes would not increase the rates above the Clinton-era tax level. This could result in slightly lower stock prices as investors demand a higher discount rate to allow the same post-tax return, but you'd be surprised how little effect this actually has on corporate capitalization.
Stock price only matters to the companies themselves when they have a secondary equity issuance or IPO, and those aren't too common these days. Hell, more companies are taking themselves private or doing major share buybacks with their recent fat profits, and they'd actually benefit from the higher capital gains rate so long as the corporate rate remains unchanged.
Also bear in mind that the people who actually make investment decisions frequently are playing with other people's money or do not pay taxes whatsoever. Foundations and other non-profits invest trillions tax-free. Mutual funds control over $10 trillion in assets, and they pass tax costs directly through to investors so they're less likely to change their investment rate hurdles than the investors themselves. All individual investors could really do is pull money out of the market, but for the typical investor, that would be shooting themselves in the foot even with a lower expected post-tax return because bonds and other assets taxed at income tax rates have such paltry returns at the moment.
In other words, for all your concern-trolling, a bump in the capital gains tax will likely have an effect somewhere between fuck and all on economic growth and asset allocation.
I also have to agree with Will Allen that our tax code's largest single problem is its complexity. Ideally, we'd scrap almost every deduction and instead just cut the rates, leaving a progressive tax schedule with a large negative tax rate for the low-income levels (basically what the EITC does these days) that tries to have as little effect on behavior as possible. Other tweaks to the system (payments for college tuitions, etc.) are probably done best as outright payments instead of tax credits.
for the historic record, let me note that i fundamentally agree with will allen at 4:13 regarding the '86 tax bill, and those aren't words ("fundamentally agree with will allen") that i've typed very often on a policy matter over the years.
as for arclight, really, fascinating viewpoint expressed at 3:59; if only there were any empirical evidence to support you....
What I don't get is why supply siders aren't a bit more chagrined given our recent economic woes.
Because they have an infallible two-step response:
(1) "What woes? We're doing great!"
[If that doesn't work, then step 2:]
(2) "We just haven't cut taxes on the rich *enough*."
Since step (2) will work until America's richest have a 0% tax rate, the supply-siders are irrefutable.
A lot of good points here, but what seems to be missing which I think is integral to the discussion, is how the candidate's respective tax policies will affect other aspects of federal policy.
For example, Obama isn't just increasing taxes on higher income earners for shits and giggles, he's looking for a way to pay for what could be a very expensive 'universal' health care program. And find money for a large investment in energy research. And 'fix' social security.
Likewise, McCain's emphasis on tax cuts means either a) he will let the deficit balloon or b) he will strictly veto any increases by congress in domestic/discretionary spending. Since he's campaigned heavily in the past on fiscal discipline, that could mean severe cuts, or lack of increases in many social welfare/entitlement programs (housing, medicaid, etc..) that are, in reality, both essential and fairly cost effective.
One more point: I think economists (such as Megan McArdle who I respect a lot) place too much emphasis on economic efficiency and growth as the ultimate goal of all policy. Are they important considerations? Of course. But there are other important considerations as well.
One last final point: The status quo of our health care system is not sustainable. Just because McCain hasn't budgeted for any major new healthcare program doesn't mean he isn't going to have to spend money on it. Medicare+Medicaid accounts for an enormous 22% of the federal budget and is growing at a prodigous rate. He's not going to have the balls to cut Medicare spending after all of America's seniors vote him in to office.
I love these quotes and they explains much of ecconomic polic in any era.
"Since the majority of ability (or opportunities for wealth creation) is contained within a minority of men sooner or later a minority of men end up owning a majority of wealth."
"By such means do the strong or the cleaver take advantage of the weak or the simple minded and this is an occupation with a venerable past and a promising progeny."
@WestIndianArchie
You're right. Changes in marginal tax rates does have an effect. The question is where exactly does that effect become too significant. The theory represented by McCain's plan is that increased productivity created by lowering tax rates on the (economically) most productive will offset the loss in revenue. The theory represented by Obama's plan is that we've already lowered the tax rate for the rich (which is at historical lows)to the point where we receive diminishing returns. Any increased efficiency is minimal, and dwarfed by the net losses to the general revenue.
So the question of "theory" is where is that inflection point. I don't know that anyone really knows. Anyway, that's where the debate goes... As some others have pointed out, there's good reason to believe Obama's raises won't seriously negate the ummm gains in productivity created by Bush's cuts.
Ta-Nehisi, given your apparent ignorance of economics and taxation policy, have you considered running for the GOP nomination in 2012? you are almost scarily qualified!
I studied economics and didnt pursue it further primarily because its more an art than science. Sometimes I wonder what's more accurate my horoscope or economic forecasts.
In any case, generally McCain's tax policy will continue to cause the government to borrow from foreigners due to large budget deficits. The budget deficits will be fueled by
-an inability to raise sufficient revenues via taxes due to their rhetorical trap: all taxes are evil and anyone who raises them is liberal, etc, etc
-the fanatical belief that the private sector makes better investments in the economy than the public sector so their taxes should be kept exceedingly low
-government expanion due to increased defense spending required to promote "democracy" around the world for multinational companies that dont pay taxes
-the ridiculous "Painless Formula for Balancing the Budget" aka Supply Side economics. Essentially, lowering taxes will actually raise revenues, which is akin to the chocolate cake diet.
Obama's policy will also raise the deficit. There's no getting around it. His priorities will be different due to the fact that he believes that some investments are best made by the government. His deficit will be fueled by
-lower taxes for the lower and middle classes. An econmic stimulus since these groups are more likely to spend rather than save.
-tax credits for renewable energy. (private investment incentive)
-possibly increased spending on healthcare reform
-increased spending on infrastructure - roads and bridges, education, homeland security(?), etc.
Basically, McCain's policy will leave all non-military investment to the private sector and hope that they make the right bets for the overall economy. The conservative finance mechanism is "Borrow and Spend". Borrow from foreigners to keep current interest rates artificially low. That increases the deficit and raises long term interest rates. Essentially, its
putting government consumption or investment on a credit card.
Obama's policy will allow the private sector to make private investments, but will also give the government a role in incentivizing private investments that have an impact on the overall economy, in addition to its role in the defense industry. The democrats financing mechanism has is "Tax and Spend". Raise taxes to finance either consumption or investment. Raising taxes excessively decreases growth either now or in the future.
Honestly I think their tax plans are largely irrelevant - what matters is spending. Spending determines the size of government, and the cost that people bear for government programs. If either candidate is going to increase spending, then we either are going to pay for it up front with higher taxes or pay for it down the road with decreased purchasing power due to monetary inflation.
Based on this concept, whichever candidate is going to spend less is in all likelihood the best candidate on the economy. I'd give this one to Obama, because he's less likely to start a war.
listen--fuck his economic policy! the planet is in peril--what is his global warmining policy? you said earlier all you wanted was him to deal with the high incarceration rate among african american males and get some chick in office (joke).
the REAL problem the next president MUST FACE: global warming. we are headed toward an "ice-free plant." off shore drilling must not be allowed. there must be a ban on new coal plants.
watch this and weep my friends:
http://www.charlierose.com/shows/2008/08/12/2/a-conversation-with-james-hansen
Please show point me in the direction of any economics book that says that higher taxes on investment and income and a massive increase in entitlement spending is a good plan in the face of a sluggish economy...anyone?
Actually, don't bother because you won't find it, unless it's Mr. Obama's campaign platform.
Thanks, Po-Mo, for addressing my question. The fact that CDOs "don't actually increase the amount of investable assets in the economy" was actually part of my point. Maybe I'm missing something, but doesn't selling and reselling these sliced-and-diced instruments at inflated prices divert invetment dollars that could be assisting (rather than undermining) economic growth? If such ponzi schemes are the result, it seems to me that a kneejerk position that entrusts the oh-so-financially-savvy wealthy to make better investment decisions than policymakers is at least somewhat flawed.
doesn't selling and reselling these sliced-and-diced instruments at inflated prices divert invetment dollars that could be assisting (rather than undermining) economic growth?
To some extent this is true, but I'd say it was true for CDOs only the the extent that it was for any other asset bubble like the tech boom or the junk bond boom of the 80s. When properly priced and properly underwritten, CDOs altogether shouldn't cost more than the underlying securities that went into them. They should just parcel out the risk differently so there are a few expensive but very safe assets along with progressively cheaper and riskier assets for sale. Now, due to poor regulation, poor understanding, and a number of incentive problems, CDOs weren't properly priced or underwritten, but I think that'll get better in the future as it usually has for new asset classes after the initial bubble investors get burned.
Institutions/corporations are actually better investors on the whole than individuals, at least in US equity markets where we have a fair amount of visibility due to good disclosure rules. However, incentives for traders and management get very screwy when institutions are investing other people's money, and this can often be found at the root of a number of finance bubbles and poor investments. This isn't a good argument that the government would make better investment decisions, but it is an excellent reason for demanding more transparency in government spending in order to allow voters to act as better managers (since voters always get stuck with the bill in the end, they're in the right position to choose if a tradeoff is worthwhile).
arclight, my poor soul, compare economic performance from 1945-1980 to that of 1981-2008; despite the fact that taxes were considerably higher in the former period, economic growth was stronger over that time frame.
now look at the period of 1981-2008; the period of strongest growth during that cycle coincides with the period of highest taxes during that cycle.
as commenters far more intelligent than you have discussed, there is such a thing as marginal impact, but judging those marginal impacts requires paying attention to outcomes.
as for "massive increase in entitlement spending" (in fact, obama's increase isn't massive enough, but i digress), indeed, there is no meaningful fiscal distinction between a massive increase in entitlement spending and a "massive increase in interest payments on the national debt and in spending on unncessary weapons systems, both of which are supported by john mccain," except that the multiplier, competitiveness, and more efficient allocation of resources comes with the former....
How much of a role does fiscal responsibility on the part of the government play in ecconomic development?
It stands to reason that a government with a balanced budget inspires confidence much like a person with a high credit rating.
Am I missing something here?
howard, you really are better than a suggestion of comparing growth rates, between 1945-1980, and 1981-2008, as a means of testing a hypothesis regarding the relationship between tax rates and growth rates. I mean, c'mon......
They both have really crappy plans, in that they will increase the feature which is the real bane of the current tax code, complexity, which promotes all manner of inefficient and nonproductive activity.
Maths is hard. Gosh, I wonder if one plan is worse than the other. Personally, I just hope we don't return to the wildly prosperous times of the 1990s. That would, like, totally suck rhinos.
Oh, and Ta, whatever Megan McArdle says, run the other way. She may eventually come around, but not after interminable, self-indulgent, non-apology posts. {shudder}
"Please show point me in the direction of any economics book that says that higher taxes on investment and income and a massive increase in entitlement spending is a good plan in the face of a sluggish economy...anyone?
Actually, don't bother because you won't find it, unless it's Mr. Obama's campaign platform."
Actually you probably wont find it, but that's (tax and entitlement increase during a recession)not the case here. Obama's plan is actually a net tax cut (higher taxes on higher income brackets plus capital, lower taxes on lower brackets , net, net, fewer tax revenues) plus higher entitlement spending during a recession. This should provide all the fiscal stimulus and consumer demand we need to keep the economy out of a deep recession without being over-inflationary.
Those that take enormous financial risks or build up innovative and beneficial businesses provide the majority of the country's economic activity, including more jobs.
I'm certain that you could take the top 10,000 wealthiest people in America, subtract the top 100 of those, and what you had left would be an entire group of people who had never built a business or taken a risk in their lives; rather, you'd have the parasitic CEO class that exists simply to move from one corporate feeding trough to the next.
To pretend that someone like that drives the American economy is ridiculous.
Yes, ed, and I'm sure you thank the rooster every morning for making the sun rise.
I guess that's the difference between being an actual Ivy Leaguer and a guy who gets mistaken for one because he blogs here at the Atlantic.
I've met a lot of Ivy Leaguers who are smart, but very, very few who are brilliant. Brilliance seems to be evenly spread around, with no one click or class favored.
Anyhoo, I suspect that you know more econ by instinct than MY, who talked a good game but had zero depth.
And then there are his plans to increase the payroll taxes (social security taxes) paid by people with family income over $250K.
I'm pretty sure it's lower than 250, because at the moment social security tax stops being taken out once you hit something a tad over $100,000 a year. So if you earn $250,000 per year, social security is taken out of your paycheck through around May, and not thereafter.
Thing is, I've never understood why this makes sense. (I'll get to your argument below.) Someone who makes $20,000 or $80,000 pays all year, but if you earn over a million dollars this year the tax doesn't apply after January? The cap affects my family, in that my husband's paycheck goes up around November each year. And I appreciate it. But I sure as hell can't give anyone a song and dance about how we deserve it.
The result of that will be that those people will receive less out of social security than they pay into it.
Golly gee willikers what a thought!!!! Good thing there's no one in the system who receives more in benefits than they put in, like payments to children after parents die, or payments to the mentally disabled, or payments to people who got into the system early, or payments to people who live a really long time.....Wait, there are. Social security is a transfer system by which the young and working take care of the old and disabled, even if they didn't manage to have children with great jobs or make a killer retirement investment that paid off in the bajillions. The idea that it's a bunch of individual retirement accounts that pay back, with a modest interest, what was paid in is a really weird fantasy.
When social security was implemented the welfare rolls went down dramatically--that was the old way to take care of the elderly.
This is one thing I like about Obama's plans for social security. We need some straight talk to keep it functioning at a reasonable level, and not letting a bunch of people out of paying taxes because they just have too much money, of all things, is one spot to start. Yes, I'll pay a little more in tax. But the net that holds my parents, and a disabled cousin, will be stronger.
Taxes need to be fair. The %age of the total paid by gazillionaires reflects just how much wealth is becoming concentrated in a top 1% or 0.1%.
Also, avoid all the people who predicted doom and gloom in 1993 when the Deficit Reduction Action Act (if you'll recall, things worked out kinda fine). These people are easy to spot. They like to turn painfully tiresome phrases (e.g., "I'm sure you thank the rooster every morning for making the sun rise."). They also label themselves "independent" or "libertarian" but do not be fooled. They're Republicans through and through.
Is anyone here aware of research on how much changes in the marginal tax rate affect behavior at very high income levels?
When we're talking about the marginal tax rate affecting behavior, we're talking about a tradeoff between income and leisure. It's easy to envision the tradeoff for a middle class person - do you want the job that pays $50k and requires 50 hours of work a week or the job that pays $75k for 75 hours a week? If the marginal tax rate is very high, you won't get to take home as much of the extra $25k, but you'll still have to work all the extra hours.
But, for rich people, the money is already of limited utility. What's the difference between taking home $50 million and $60 million? At some point, it's just a way of keeping score. I'd be suprised if small changes in the marginal tax rate would really cause these people to just take longer vacations.
Actually, ed, I never make predictions or causative statements or implications with regards to what are somewhat small changes in tax rates. That's a really stupid thing to do, and I try to leave such behavior to people like yourself. Now go feed your rooster; you don't want to drive to work in the dark, do you!?
Is anyone here aware of research on how much changes in the marginal tax rate affect behavior at very high income levels?
Actually, some of the best research in the area and meta-surveys of the existing literature (essentially recrunching the past data, correcting for spurious correlations that were not caught by the original authors) has been done by Austan Goolsbee, a University of Chicago professor and top economics adviser to Obama. Here are two of his most relevant publications.
The short answer is that increases or decreases in the marginal tax rate for the the rich seem to have little long-term effect on income or tax revenues. The large short-term effect is mostly due to early exercise of stock options or similar acceleration of long-term bonuses to squeeze them in before the tax hike. The articles themselves aren't too tough of a read though, he's a pretty good author.
Ta-Nehisi,
There may be worse ways to find intelligent analyses of the candidates' tax plans. But, not much worse.
You'd be much better off talking to Megan.
The words "supply side" have been thrown about a good bit here, and I'd like to explain a bit what supply side economics is, and specifically the laffer curve.
Arthur Laffer came up with the concept, which is mathematically provable, that at a sufficiently high tax rate, lowering that rate will cause govt revenue to rise. It does NOT say that our current rate is high enough to trigger the effect though.
Consider the following:
Revenue at 0% tax rate: $0
Revenue at 50% tax rate: $Some large positive number
Revenue at 100% tax rate: $0
This means that at some point on the curve, it is sloping downwards (aka increasing taxes lowers revenue). It does not say that point is anywhere near current tax rates, and it's highly unlikely it is.
Supply side and demand side (or Keynesian) economics differ largely in which curve (supply or demand) fundamentally prompts output. Under demand side, government expenditures promote growth because they lower the total amount of savings relative to consumption, causing more consumption which causes more to be produced. Supply side economics argues that this sort of demand shock is unsustainable, and that the way to promote growth is to lower costs on businesses, so that they can produce more at the same price.
This is a gross simplification of course, but both represent legitimate schools of economics, with large amounts of mathematical and empirical reasoning behind them.
Don't use "supply side" as a pejorative. It represents a legitimate and well studied school of economics.
[i]Since step (2) will work until America's richest have a 0% tax rate, the supply-siders are irrefutable.
Posted by Anderson[/i]
Just wanted to point out that there's nothing in supply side logic to argue against having a negative income tax rate.
I don't think you should be embarrassed. America's tax code is so cryptic as to be impossible for anyone to understand save for those who commit their lives to its study (accountants). The only tax reform that will effect meaningful change is a complete overhaul of the tax code, starting from scratch and closing loopholes. Both candidates give lip service to such an overhaul, but neither has really proposed doing it in full. While Obama wants to close loopholes for corporations, he hasn't talked too much about closing individual loopholes, which make up a huge part of the problem. Clearly, I don't even really bother to examine differing tax proposals, but that's because the only candidate in this election cycle who really seemed to understand how messed up the tax code is was the one I was least likely to vote for (Huckabee).
On the economy, how can both Obama and McCain be leading on the economy?
Reuters' new poll says "McCain now has a 9-point edge, 49 percent to 40 percent, over Obama on the critical question of who would be the best manager of the economy -- an issue nearly half of voters said was their top concern in the November 4 presidential election."
While LA Times/Bloomberg says "Obama beats McCain on who has better ideas for strengthening the nation’s economy. Nearly half of voters think Obama is the candidate for the job, while more than a quarter thought that of McCain. In a similar question in the June Times/Bloomberg poll, it was 49% for Obama and 28% for McCain. Just about a fifth of voters in the current poll said neither or both would be good on this issue. Independents and moderates give this issue to Obama. Whites are somewhat divided, but giving Obama a four point edge over his opponent. Both men and women agree that Obama is the candidate to strengthen the nation’s economy."
I just don't get it.
Deborah - You should check your DNC talking points. The Democratic Party line is that Social Security is a retirement insurance program with retirement benefits roughly tied to payments. The Democratic Party strongly resists the suggestion that is is an income transfer (i.e., welfare) program.
Now if you want to concede that it's not an insurance program but rather a welfare program, as I said, that's OK with me, but in that case we ought to completely rethink how it's financed. I strongly favor eliminating all payroll taxes (social security and medicare) and having everything paid for by income taxes. You should favor that, too, I would think, given that payroll taxes are regressive and a drag on employment rates. I would strongly prefer a single flat rate with no credits or deductions so that everyone pays at the same rate: if that rate were 30%, and if you make $1 million, you pay $300,000, and if you make $10,000, you pay $3,000. But I could live with a split rate, say 15% for all income up to $75,000, and 32% for all income over that. (N.b. I'm not an economist and I haven't run the numbers so I have no idea if these percentages would work.)
Right now we have system in which tens of millions of taxpayers think that Government programs are free because they pay little or nothing in income taxes. That's wrong and its destructive to the feeling of a common purpose that is at the heart of democratic self government. Everyone should feel that every Government program - whether it's the Army or welfare payments for old or disabled people or support for theoretical research on astrophysics or aid to students, or whatever - comes out of their own pocket. That's the only way to restore any sense of responsibility to the system.
If you want to read an opinion on Obama's economic proposals from the opposite end of the political spectrum, see this IBD editorial, "Like father, like son", which compares Obama's plans with those his leftist economist father proposed to the Kenyan government 40 years ago. It's a reach, of course, to suggest that Obama is as far to the left on economics as his father apparently was, but I think the IBD is correct that Obama's background and ideology are further to the left than he lets on.
The thing that bugs me, is that stat that 10% of the income earners pay 70% of taxes. It's made without an reference to whether or not it makes sense that they are paying 70% of the taxes. What percentage of the money made in the US is made by the top 10%, or the top 1% even? Are they paying a disproportionate part of the taxes, or are they paying a fair amount based on the incredible amounts of money they earn?
Jordan,
From a 3/27/07 NYT article:
"The analysis by the two professors showed that the top 10 percent of Americans collected 48.5 percent of all reported income in 2005.
* * *
"The top 1 percent received 21.8 percent of all reported income in 2005."
Hope this helps.
Past and Aspiring Ex-Pat here.
It chagrins me that the US is the only nation to tax its ex-pats. After the $82,400 deduction, you're paying taxes as if you were in the US. Neither McCain nor Obama is willing to do anything about this. Now, while tax treaties exist to protect against double taxation, there are some basically tax-free places (Singapore, Hong Kong), in which Americans are taxed. What's up with that? It seems that Obama could court the ex-pat vote pretty easily.