Wednesday, August 13, 2008

Marginal Rates Under Obama's Tax Proposals

A few comments on this discussion via Greg Mankiw of marginal tax rates under Obama's proposal:

1) I'm not 100% sure that the figures shown are correct. The article cites the Tax Policy Center's analysis, but TPC didn't calculate marginal tax rates under the candidates' proposals. I would want to see the source information cited fully before agreeing that these numbers are accurate.

2) This is clearly a partisan analysis intended to make Obama's tax plans look scary. The article shows only a worst case by considering a specific family that would experience especially high marginal rates, due largely to phase-outs of Obama's college tuition credit and child care credit proposals. These marginal rates would only be faced by this family during a very limited period. (Admittedly, the temporary nature of these high marginal rates could lower tax revenue somewhat, since some households can shift income across years to avoid the higher rates while their kids are in college.)

3) For the non-economist, just looking at marginal rates is very deceptive. The TPC's analysis shows that in 2009, under Obama's proposals, average tax rates would decline for 95 percent of taxpayers. (This is on average, averaging over quintiles and over the 80-90 group and the 90-95 group. See Table 1 of the TPC's analysis, which is here.)

4) Anyone who's thought about tax policy would agree that a simpler regime, without all the phase-ins and phase-outs, would be preferable to the current maze of credits and deductions. If I were the tax policy deity, I would institute something like the Unified Children's Tax Credit, which would wrap together many of the current pieces into a much more transparent setup.

5) Do smallish differences in marginal rates matter much? My impression is that labor supply responses to marginal rate changes are small, except perhaps when rates hit really extreme rates, like the 80%+ of the 1950s. However, I'm not up-to-date on the research on this topic, so I'm hoping Jonah can lend us his more informed public finance insights.

UPDATE: Jonah has a more detailed discussion making some of the same points here.

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