EconomistMom recently defended, after a fashion, Alex Brill and Alan Viard’s notorious article claiming that the Obama tax plan would raise effective marginal tax rates on middle-class taxpayers. They’re making a mountain out of a molehill, she concludes, even incidentally distorting the Obama tax plans along the way, but to her knowledge (of the two of them) wouldn’t be deliberately dishonest. More below the fold.
Before you say “born yesterday,” she’s almost surely right at the very least in the sense that if you’re running the in-house publication of a conservative think-tank, you need only run down (say) the list of the economist supporters the McCain economic “plan” — yes, even the subset who actually read it! — to find people who earnestly believe that lack of incentives to make money is a serious problem for the U.S. economy and willing to write something up to that effect. The economists are then pure (if deluded) and the upshot, for the policy entrepreneurs, is perhaps even better than hiring obvious hacks. Among other things, real economists like Jonah Gelbach will engage those issues.
As a comments-hoisting aside, the Brill and Viard piece highlights a cost of conducting progressive policy through tax expenditures. I don’t think even center-leftists of the Obama camp are necessarily opposed to public provision of the services they’re trying to fund through the tax system, but to some extent they’ve pre-compromised on packaging them as delectable tax cuts to make them appeal to conservatives. At my old place, I’d argued that liberal think-tankers need to take a lesson from the Heritage Foundations of the world and advocate the policies they really want:
I agree with TCT [Madison’s late progressive newspaper] that CAP needs to eat its spinach [in the Popeye sense]. It comes across like a center-left-center quasi-counterbalance to the only moderately wingnutty American Enterprise Institute rather than what it arguably needs to be, which is the Heritage Foundation of the left.
The lack of boldness cited by TCT is particularly evident in a misplaced fetish of pragmatism. Why misguided? Sure, CAP policy proposals would constitute a distinct improvement over Bushism, but their chance of getting any of them enacted with Republicans in charge of the executive and legislative branches is effectively zero [this was written in 2005, but things have changed surprisingly little]. And CAP policy proposals are not likely to fire people up to elect Democrats.
There is consequently no cost to thinking bigger (abstracting from CAP’s funding sources), and in fact there are likely to be massive longer-term benefits in that incubating actual progressive ideas is an entrée to building a political coalition for their enactment… [R]ushing, or at least appearing to rush, into the vacuum left by right-running Republicans fractures the progressive vote.
And for all that, the wingnuts pay liberals back for their efforts at compromise by complaining that those tax cuts just make the tax code more complicated and screw up “incentives.”
Meanwhile the marginal rate business seems to be a meme on the other side of the fence, as Greg Mankiw heh-indeeds a Tax Foundation blog post suggesting that the top effective Federal personal tax rate would increase roughly 10-12 percentage points under Obama tax proposals. (See?) Sez Bob Carroll:
Note: These calculations work as follows: (1) 37.9 percent equals the current 35 percent top income tax rate plus the current 2.9 percent Medicare tax rate; and (2) 48 to 50 percent equals Obama’s 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemption and certain itemized deductions.
Is this calculation ingenuous and totally correct? No, it is not. Sort of like Brill and Viard, Carroll is calculating what will tend to be top inframarginal rates applying to portions of the income of the very well-to-do. They don’t do much to characterize of the general tenor of the Obama tax plans as they’d affect the median voter — other than, maybe, the feature of shifting more of the tax burden back to the rich (apparently Prof. Mankiw cares personally about those rates).
First, a regularity of upper-income tax returns is that much or most of the income comes from non-wage sources that aren’t subject to the payroll tax. According to the latest (2006) tax filing statistics, taxable returns with Adjusted Gross Income (AGI) between $500,000 and $1 million — the lower-middle class, per John McCain — reported on average $678,000 in AGI and $591,000 of taxable income, of which wages and salaries averaged only $320,000. All that non-employment income would be taxed at no more than the statutory rate for ordinary income — so the difference there is the 35% Bush-era rate vs. the 39.6% Clinton-era rate. Suggesting that the Clinton-era rates don’t provide sufficient incentives for the near-rich and rich to make more money is silly.
Another issue pertains to adding 4.5 percentage points for the exemption and deduction phaseouts to Obama’s rate. The statutory phaseout rates are 2.8% for personal exemptions and 3% for itemized deductions, or 5.8%. Nevertheless, Carroll is not being generous by charging Obama’s plans with 4.5% instead of 5.8%. For one thing, the personal exemption is, except for weird cases — married taxpayers with adjusted gross income in a narrow band around $360,000 and next to nothing in itemized deductions — already phased out before you get to the top bracket. So the effective net hit is no more than 3%, and probably a lot less if not zero. That’s because in this income range, the ordinary income tax interacts strongly with the Alternative Minimum Tax (AMT), with AMT taking away deductions given back by the phaseout of the phaseout. (If you want to view that last sentence as an argument for tax re-simplification, I wouldn’t argue.) It’s worth remembering that increased AMT incidence was a feature of the 2001 tax cuts from the perspective of reducing the law’s apparent revenue reduction and gulling the theoretically fiscally conservative into voting for them.
More broadly, this focuses attention where it should not be, which is to say the plight of the rich — who don’t especially need help (beyond generally sound economic policies) staying rich or getting richer. Though it does seem, fortunately, that the Obama campaign has figured out that they have an issue there.