Monday, June 16, 2008

Questions from Krugman on Obama's Tax Policy

A reader wrote in asking me to comment on Krugman's questions regarding Obama's tax policy in today's column. Krugman's main point is that the Bush tax cuts have restricted the options available to the next president. When it comes to Obama, he says the following:

These tax cuts would mainly benefit lower- and-middle-income families, although this can’t be said of Mr. Obama’s plan to eliminate income taxes on seniors with incomes under $50,000: since most seniors already pay no income taxes, this would do nothing for those most in need. And one wonders why we should create the precedent of exempting particular demographic groups from taxes.

But the big question is, are these tax cuts, however appealing, a top priority? The most expensive proposal, under the title Making Work Pay, would give most workers $500 in tax credits, at a 10-year cost of more than $700 billion. Isn’t it more important that workers be assured of health care?
...
One more thing: on Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade.

But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?
I've put Krugman's "questions" in bold. I use the scare quotes because these aren't really queries, but rather are rhetorical questions he's using to express his own view. Translating to declarative sentences, Krugman thinks there's no reason to exempt income taxes for seniors making under $50,000, that a health care reform is more important than lowering taxes for most workers, and that while raising taxes on those earning more than $250K is a good idea, the money should go to something other than shoring up the Social Security Trust Fund.

As a whole, Obama's program would dramatically shift the tax burden to the wealthiest, particularly those in the top 1 percent, while reducing taxes. As this graph based on the Tax Policy Center analysis shows (stolen from Kevin Drum), taxpayers in the bottom four quintiles would see their after-tax income rise under Obama.
Krugman's column implies that the tax program he would favor would increase taxes on everyone, except maybe those in the bottom quintile, in order to be sure that there would be plenty of money for the Obama health care plan. Krugman would like Obama's message to be "Yes, taxes will have to go up on most Americans, in order to pay for an expanded health care program." Putting the merits aside (on which I don't have a firm opinion), I think it's clear that Obama's plan is more politically marketable than Krugman's. But this is exactly Krugman's point--the Bush tax cuts (and years of Republican anti-tax rhetoric) have made it fatal to propose tax increases on most people.

On Social Security, my view is that Krugman is right--we have bigger priorities right now than worrying about the possibility of a long-run shortfall in the Social Security Trust Fund. But he and I are in the minority among liberal-minded economic policy watchers. The same Tax Policy Center gurus that Krugman cites fault Obama for not doing enough to address Social Security.

7 comments:

Lawrence Khoo said...

Calling it a 'Social Security payroll-tax surcharge' sounds like a politically marketable way of raising taxes. Revenue will probably be lumped with other tax revenues, and can be used for anything.

MattYoung said...

This is a debate between conventional "liberal" policies and the libertarian nudge policies.

The conventional liberal wants the full faith and credit of the executive involved with managing the instability of the double humped wealth distribution.

The libertarian nudger wants a separate deal between wealth and poverty in which both parties understand the problem of wealth instability.

If Obama were true to his economic advisers, he would have the very wealthy subsidize medium termed savings accounts for the poor. His advisers would treat that agreement as a separate poverty stabilization fund. Obama would likely get stronger support for the libertarian nudge process.

Anonymous said...

Lets put Obama's tax policy into perspective: We are currently in an economic downturn where the marginal consumer is at risk, reducing spending and their contribution to corporate and overall GDP growth. Individuals earning over $250,000 contribute a large portion of this countries GDP and in many circumstances represent the marginal consumer of service related products which represents the majority of economic output in our country. Raising taxes on these individuals will reduce their disposable income. The negative impact on the economy wouldn;t even be close to offset by the tax relief for lower income families who's tax rate is already very low. One of the biggest drags on the economy has been the housing market and related industries (construction, home improvement etc.). Low income individuals are not in a position to lend support to this industry group as they don't have the financial means to responsibly finance a new home. Taxing the individuals who could potentially be purchasing new homes and lending support to the current crisis will only prolong the current downturn in the housing market.
Obama also plans on raising taxes on dividends and capital gains. This discourages investment in U.S. companies and industries depriving our corporations of invaluable capital which has already been pinched due to the recent credit crunch. With real estate price depretiation, the consumer is already strapped to find sources of alternative income. Increased taxes on cap gains and dividends would further hamper the individuals ability to accumulate wealth thus preventing them from increasing their spending and contribution to the countries economic prosperity.
Obama also would liek to raise corporate taxes. This will prevent companies from reinvesting in themselves and growing organically. These increased costs will also find their way to the average worker as salaries ill most likely grow at a slower rate and hiring will decrease effectively raising the unemployment rate. This also discourages foreign corporate investment as foreign companies will be less inclined to expand into the U.S. because of prohibitive tax law. These issues should all be considered when evaluating economic policy

Anonymous said...

obama policy on taxes will take 11.5 trillion right out of the economy at a time we can least afford it. socialistic and marxism policies have not worked in the past and will not work now. america needs less government and more freedoms for its cirizens,not more taxes and bigger government programs.

Anonymous said...

INCREASING THE CAPITAL GAINS RATE PER THE OBAMA TAX PLAN IS TOTAL LACK OF UNDERSTANDING ON HIS PART.CAPITAL GAINS ARE MADE THRU INVESTING IN AMERICA WHETHER ITS LAND,INVESTMENTS,BUSINESS ACTIVITY OR ANY OTHER MEANS THAT CREATE CAPITAL GAINS. THESE INVESTMENTS ARE WHAT CREATES AMERICAS ECONOMY. THOSE WHO RISK THEIR OWN MONEY TIME AND ENERGY NEED NOT BE TAXED EVEN AT 15% LITTLE LONE AT THE ABSORBENT RATE OF 25 TO 35 PERCENT AS OBAMA PROPOSES.ELECTING THIS MAN WILL RETURN OUR GREAT COUNTRY BACK TO THOSE YEARS OF THE JIMMY CARTER ECONOMIC CATASTROPHYS OF THE LATE 70S.REMEMBER 18% INTEREST RATES,BANKRUPT AT ALL TIME HIGHES.

Anonymous said...

Hey, conservative rich-guy apologists: If raising taxes, especially on the rich, is such a killer, then how come Clinton's 1993 move to undo the last of the Reagan-Bush tax giveaways resulted in the Clinton Boom -- which, unliks the "Bush Boom", actually benefitted everyone and not just those at the top?

Please try to answer this without capslock. Thank you.

Anonymous said...

Hope you all learned Chinese for at this rate China will be our new overlords.