Thursday, June 19, 2008

Reader Mailbag: Distributional Effects of Tax Policy

A reader writes:

Can you design a calculator that captures basic from me that I used in my 2008 tax forms - and gives me three pieces of information:

- My approx taxes last year (verifies the accuracy of the calculator)
- My taxes under the Obama plan; and
- My taxes under John McCain plan.

If I earn less than 250K I should see savings under Obama plan and increases under McCain plan.
I have three different answers:

1) No, this is far beyond the duty and talents of an unpaid, pseudonymous econ-blogger who should be enjoying his week of vacation in the sun rather than writing this blog post.

2) The figure I included in this post shows changes in after-tax income by income quintile under the McCain and Obama proposals.

3) Looking at the near-term tax incidence of candidates' proposals is really the wrong way to decide who you're going to vote for. That's because both proposals--and especially McCain's involve huge deficit financing. Based on the Tax Policy Center's projections, McCain relative to Obama would add an additional $1 trillion to the national debt over ten years. That $1 trillion will have to be paid back, with interest, by you or your kids. Once you take those future payments into account, the effect of taxes on income looks worse for everyone.

Bill Gale and Peter Orszag produced this compelling analysis in 2004 of the long-term effects of the Bush tax cuts by quintile, taking into account that tax cuts financed by borrowing translate into less services or higher taxes later on. Under different assumptions, they found that the tax cuts made those in the bottom 80% of the population worse off. Peter is now at the Congressional Budget Office, so he's not doing this kind of work these days. Maybe Bill will consider producing a similar analysis for the McCain and Obama proposals?

No comments: