Thursday, August 14, 2008

The Obama Tax Plan, and the Hidden McCain Tax Hike

Goolsbee and Furman make the case for the Obama tax plan in the Wall Street Journal today.

One point they mention is one I've heard Goolsbee say in person, but that hasn't been picked up at all by the press. Apart from all the other severe dangers of McCain's plans to kill the current system of employer-provided care, his proposal would push many people into higher tax brackets, increasing both their total tax bills and their marginal rates. This is because employer-provided health care benefits would become taxable. In the most optimistic scenario (from the point of view of McCain's advisers), employers would drop their health care coverage and increase wages by an amount equal to the value of the employer health contribution. In 2007, this was about $9000 for the average family (see chart here).

Exactly how big of a tax increase would this be, and for how many people? In the worst case, for married couples filing jointly, making $65K, which is at the edge between the 15 % and 25% brackets, it would be a tax increase of about $900. [That's (25%-15%) * $9000.] Figuring out the exact distribution of increases would require a simulation using actual tax return data, which I think only the IRS, the CBO, and the Tax Policy Center have. However, this health care tax increase was not taken into account in the TPC's evaluation of the candidates' tax proposals. Goolsbee and Furman mention CBO research on the topic, but I haven't been able to find the relevant report. Can anyone provide a reference?


Ken Houghton said...

On a quick glance, this PDF looks promising.

Don Pedro said...

Yes, I'd seen that. I don't think it directly addresses the "bracket jumping" question, though.