Obama's Tax Plan - And Basic Honesty
Greg Mankiw posts this graph under the title "The Obama Tax Plan":
Economists for Obama respond:
Obama's Tax Plan and Basic Honesty, by Jonah Gelbach: Greg Mankiw links to this attack on Obama's tax plan by Alex Brill and Alan Viard of AEI. Mankiw's post provides only a graph titled "Effective Marginal Tax Rates: Obama v. Current Law", offering the link so that readers can "Click through to the read the thousand words". From what I can tell, the Brill-Viard piece, titled "The Folly of Obama’s Tax Plan", is one of those screeds meant to confuse rather than inform.
1. According to Brill and Viard, the chart Mankiw posts shows
"the marginal rates in 2009 for a two-earner couple with two children—a college freshman and a 12-year-old receiving after-school care—under some specific assumptions"
Now, when you see someone relying on a special case like a two-earner couple with two children, one of whom is a college freshman and the other is exactly 12 and receiving after-school care, you know there's cherry-picking going on. Here, Brill and Viard are clearly trying to maximize the impact of tax-credit phaseout rules on marginal tax rates. And they don't tell us what their "some specific assumptions" are. Judge for yourself whether it's fair to take this one special case and call it "Obama's Tax Plan".
2. Brill and Viard are very helpful to readers, asking and answering the question "What accounts for the higher rates?" (they mean the ones in their cherry-picked chart, specifically). Here's part of their explanation (emphasis added):
First, Obama expands the maximum child and dependent care credit for families with one young child from $1,050 to $1,500 and phases down the credit over a longer income range, from $30,000 to $58,000. Throughout this income range, the credit is phasing out at a rate of $30 per $1,000 of income, thus raising the effective tax rate by 3 percentage points. Obama also makes certain credits refundable, which introduces a tax penalty of 10 percent or 15 percent, depending on the income bracket.
To understand how deeply dishonest the Brill-Viard piece is, you need only recognize that each of these three examples is a case in which Obama's plan increases the after-tax-and-transfer income available to the people at issue. The rest of their explanation involves Obama's proposal to increase the maximum of the current Hope Scholarship Tax Credit for college from $1,800 to $4,000 while keeping the same phaseout range. Three comments:
- When a plan "expands" a credit's maximum, it is increasing the credit's generosity, not decreasing it.
- When a plan "phases down the credit over a longer income range", it is increasing the credit's generosity, not decreasing it.
- When a plan "makes certain credits refundable", it is increasing those credits' generosity, not decreasing it.
Marginal tax rates rise under Obama's plan in this cherry-picked example (assuming that Brill and Viard haven't cooked the numbers themselves) because credits have to be phased out at higher incomes, or else everyone will receive them, making them much more expensive. This is hardly a new concept, and Greg Mankiw surely understands it well. If he and the AEI distortion machine wanted to have an honest debate on Obama's tax plan, they could discuss its cost, or they could provide an honest argument over why they think the disincentive effects of higher marginal rates outweigh the benefits of increasing disposable income for lower and middle income folks.
Instead, their argument boils down to making a big deal about the fact that disincentive effects....exist! That sort of observation won't win you the Nobel prize.
The key point that Brill and Viard neglect to note or discuss is that even in their cherry picked example, higher marginal tax rates bring along offsetting benefits to families with lower and middle incomes. If the families don't change their behavior, their disposable income will be higher, not lower, under Obama's plan. If they do change their behavior, then by revealed preference, these families will still be better off, since every supposedly nefarious change in the tax code that Brill and Viard mention is an expansion in generosity. Revealed preference says that you can't be made worse off by having more options. This is a question of basic microeconomics.
It's also a question of basic honesty.
An honest article meant to inform would show both the marginal tax rates graph and a graph of after-tax-and-transfer income against pre-tax-and-transfer income. I assure you that there is a very good reason that Brill and Viard don't include that second graph. Of course, a really honest article wouldn't cherry pick the way Brill and Viard did, either.
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This article has 19 comments:
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jdspain
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14 Comments
Aug 14 08:06 AMWhat is the real story?
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accountant
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12 Comments
Aug 14 08:50 AM-
pockyclips 2020
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154 Comments
Aug 14 08:51 AMwill deflate under a McW administration with at least $2 trillion more debt by 2012? And without a tax increase to pay for our various wars (4 now possible). You either pays your front rent or your back rent, but you will pay either way! I'd rather pay my expenses up front.
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Aaron.J
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1 Comment
My Website
Aug 14 09:12 AMWho the hell are you to determine how I live? Who are you to take my hard earned money for your own nepharious purposes?
Aaron.J
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CLH
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717 Comments
Aug 14 09:27 AM-
sr9web
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187 Comments
Aug 14 10:34 AMHar! Obama is a hard-core Marxist - if you think otherwise, you are deluding yourself.
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User 86999
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98 Comments
Aug 14 11:25 AM-
herohero
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15 Comments
Aug 14 12:01 PMI don't see him as any kind of improvement. I'm voting for McCain, if only out of damage control mode.
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TinyTim
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170 Comments
Aug 14 01:25 PM-
TinyTim
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170 Comments
Aug 14 01:32 PM1- Is Obamas plan revenue nuetral?
2- what are the effective rates at different income levels for a general case?
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Alan Viard
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2 Comments
Aug 14 01:37 PMEFO's suggestion that we "cooked" the numbers is a vile libel for he which they present no evidence. The accusation is utterly false.
EFO says that it is "deeply dishonest" and a violation of "basic honesty" to say that Obama's plan would raise marginal tax rates as well as reducing tax payments. In fact, since Obama's plan would do both of those things, basic honesty requires that both effects be mentioned, as we do in our article. We repeatedly make clear that Obama would cut taxes for the poor and the middle class: the topic sentence at the beginning of the second paragraph states that "Obama is offering a new series of tax breaks," the next paragraph says that he would make some tax credits refundable (and illustrates refundability with an example which makes clear that it involves a reduction in tax payments), the fifth paragraph mentions that he would expand a tax credit and repeats that he would make credits refundable, and the seventh paragraph mentions that he would increase another credit's maximum value. EFO actually quotes some of these statements. It is unclear what aspect of Obama's tax plan we are supposed to have concealed, but it certainly can't be the fact that he's cutting taxes.
Yesterday, one blog (that apparently looked at the chart without the article) did trumpet our work as showing that Obama would impose "higher taxes" on nearly everyone; I immediately posted a comment explaining that Obama would lower tax payments.
The point our article makes is that Obama's tax cuts are designed in a way that increases disincentives by raising marginal rates and increases complexity. Since EFO admits that the disincentive effects exist (and explains why they arise), it is unclear why they consider this claim dishonest.
Of course, people are perfectly free to draw different policy conclusions from this fact; that's the kind of debate Alex and I hoped to encourage. So far, the disincentive effects have scarcely been mentioned, so pointing them out is a necessary step towards informed discussion.
I don't have space to defend the example, but it is not "cherry picked." Some other examples would show bigger disincentive effects; others would show smaller. Unfortunately, there is no typical example to fall back on, because different kinds of households are affected in so many different ways. But, since it's undisputed that Obama makes credits refundable and increases the use of phase-outs, any example will show these kinds of disincentive effects. Can any of our critics construct a remotely realistic example that doesn't? Again, EFO admits that the disincentive effects exist. (As a side note, the child in our example need not, of course, be exactly 12, but can be any age 12 or younger).
Alex Brill and I hoped that our article would call attention to the disincentives and complexity of Obama's tax cuts, an important topic neglected in the discussion to date. It is unfortunate that this discussion has been sidetracked by misinterpretations of the (clearly stated) points in our article.
Alan D. Viard, Resident Scholar
American Enterprise Institute
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Alan Viard
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2 Comments
Aug 14 01:39 PM-
wpdragon
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211 Comments
Aug 14 01:47 PMenuff said
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fabian hug
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160 Comments
Aug 14 02:22 PMNow you should kick away the IRS and get Russia, they have a flat 13% tax.
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Matt Blackman
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175 Comments
My Website
Aug 14 02:49 PM1) Obama would put the top marginal tax rate back to 39.6% which would make US corporations the most heavily taxed in the OECD.
2) He would remove the "tax breaks" that US corporations now enjoy, tax breaks (like the Foreign Sales Corporation rules and subsequently Jobs Creation Act) that were enacted to try to balance the fact that the US is the only industrialized nation that taxes both citizens and corporations based on citizenship, not domicile (like every other OECD nation), which will make them even less competitive globally.
Two of the most destructive actions a political leader can take in a declining economy is to a) increase taxes and b) increase tariffs, both of which Obama has promised.
He is obviously not a student of economic history because if he were, he'd realize just how misguided these action are. Herbert Hoover did exactly that in 1930 and 1931 by raising tariffs (Smoot-Hawley) then raising taxes which were greatly exacerbated the impact and severity of the Great Depression.
What is that line from Forest Gump? Stupid is as stupid does...
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unimpressedpragmatist
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74 Comments
My Website
Aug 14 03:41 PMAlong with this is an adage from PolySci that heavy taxation is a staple of Marxist/Socialist government while low taxes are the underlying strength of a Democratic/Capitalist society. Obamanation is a Marxist Big Government advocate and his rhetoric and planning prove it. Whether or not he gets to implement his dream of socialism and ruination for this country is up to the electorate. And, a handful of extreme leftists with their prevarications and spin will have little to nothing to do with the voters' decisions and actions. But, they will keep on trying and crying.
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mixter
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91 Comments
Aug 14 07:13 PMHe will be worse than Jimmy Carter could ever have been.
Yuck!
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sloppyg
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3 Comments
Aug 14 10:00 PM-
jgamboa
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1 Comment
Oct 13 01:07 PM