Attacking Obama’s Tax Plan With Basic Dishonesty

Greg Mankiw was quite impressed with a graph from Alex Brill and Alan Viard but Jonah Gelbach was not:

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 … 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 … 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 … 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.

That the AEI would mislead its readers in this way strikes me as old news. But when a Harvard professor endorses such a distortion, this is really sad.

Update: I should let Tyler Cowen have the last word on this:

The key point is this: “Reducing a person’s tax credit as his income goes up also reduces his incentive to earn more income.” But before some of you get all upset, I do not intend this presentation as an endorsement of John McCain’s utterances on fiscal policy.

Addendum: I am not saying that Obama is “raising taxes on the poor.” It is about marginal rates and yes marginal rates do matter for incentives. This is a genuine problem of many indeed most anti-poverty programs, it is not an attempt to mislead anyone. Don’t treat everything as necessitating a response to right- or left-wing talking points. You still ought to look at this diagram and think that the “notches” are too discrete and too strong.

Well said!