Tuesday, September 2, 2008

Obama vs McCain on Taxes: Feldstein and Taylor Can't Obscure the Truth

There are a number of points worth addressing in countering the Wall Street Journal oped piece by Martin Feldstein and John Taylor. The most important one is that they rely on the complicated nature of McCain's so called health plan to obfuscate one very salient point: More people will get a tax cut under Obama's plan than McCain's. (I hope this is a clear enough statement for Krugman)

First, its important to note that despite their misleading rhetoric, even Feldstein and Taylor acknowledge that 95% of families will see tax relief under Obama's plan:

Mr. Obama's claim to being a big tax cutter defies credibility. His assertion that he would cut taxes on 95% of families reflects his one-time $1,000 rebate payouts, and a variety of new government spending handed out through the tax system.
Those two sentences do not in any way diminish Obama's claim --95% of families affected by these tax policies will pay lower taxes. You can try to call tax cuts for a particular purpose that you don't like, "government spending", but that doesn't make it so. By that logic, McCain's corporate tax cuts or investment credits or changes in personal exemptions are also government spending. Its somewhat painful to see such two highly distinguished economists having to resort to verbal gymnastics to try to counter a basic factual claim.

They then try to refute Obama's claim that McCain offers no tax cuts for 100 million families:
Mr. Obama also criticized Mr. McCain on the grounds that he doesn't cut taxes on 100 million families. But this ignores the fact that Mr. McCain's health-insurance credits would benefit most taxpayers and that many people who are not currently eligible for the increased personal exemption will become eligible when they have children. When these features are taken into account, the vast majority of today's 140 million taxpayers would pay lower taxes under the McCain plan.
Lets take that apart. First note that they essentially acknowledge Obama's claim has some merit but argue that it doesn't include two offsetting factors. The first is a claim that the health insurance credit McCain institutes will more than offset the increased income tax that is part of McCain's health plan (this is due to the fact that employee spending on health insurance will no longer be tax exempt).

What they completely ignore is that the whole point of the health plan is to shift health spending away from an employer based system. That is, once they remove the tax benefits of employer provided health insurance, they are actively encouraging employers to drop insurance coverage. (Note that they like to talk about incentives but only when it suits their argument). For those individuals who lose employer coverage (the purpose of the plan --see Don Pedro's post) it is not at all clear that they will pay lower taxes. It is only those who maintain employer coverage who may see a net benefit. So, how many people will lose coverage and how many will see a net tax benefit? No one knows because it is a very complicated question (see this post by Henry Aaron of Brookings). Note, Feldstein and Taylor do not provide an estimate of these numbers. Once they provide a number (and the basis for the calculations) then one can engage in a reasonable argument about the parameters. Until then the burden of proof is on them to calculate the numbers on how many will actually see reduced tax payments. In doing so, they'll be caught in a bind, because they will be forced to uncloak the point of their plan, which is to eliminate employer-based coverage.

The second claim, that some couples will soon have kids and then become eligible for McCain's increased personal exemption is kind of silly. Basically, they are ignoring that other families will no longer be eligible once they become empty nesters. I think here they are grasping at straws. This is buttressed by the fact that they provide no numbers but simply claim that "the vast majority" will see tax declines. If they could reasonably claim more would get a tax cut under their plan than under Obama's they would say that loud and clear --but they can't!

Bottom line: More families get a tax cut under Obama than McCain. Also see Jonah's great post which shows visually, exactly who will benefit from each tax plan.


Don Pedro said...

Nice post. And Henry Aaron's article about some (not even all!) of the uncertainties around McCain's health care plan is very well done.

Note, however, that it's less clear to me now whether or not McCain's health tax credits could still be used by people who continued to have employer-based coverage. I assumed in my earlier post that they could not, because that was my understanding based on what I'd seen in media reports and Holtz-Eakin's explanation. But I noticed that the Tax Policy Center's preliminary analysis assumes that people with employer-based coverage can still claim the credit.

I've been waiting for a more comprehensive analysis of the proposal to come out so that I could write an updated, better-informed post. But I haven't seen anything--I suspect this is because for the reasons Aaron points out, there's tremendous uncertainty in how McCain's proposal would work out, so it's very hard to forecast.

What is clear is that the goal and endgame of the McCain proposal is killing the current employer-based system. Confusingly, though, Holtz-Eakin denies this is the case (in an NY Times article I cited in my earlier post.)

Anonymous said...

Obama's fundamental guiding principle regarding economic theory seems to be this: in the name of fairness, we must set up a system that redistributes wealth from high to low. Does any legitimate economist subscribe to this as the fundamental guiding principle for deciding good economic policy? Do we really want a president who sees it as his mission to tweak the economy to be "fair" according to his definition of fair? I certainly don't.

I am in favor of pushing as much of the responsibility to the consumer as possible and McCain's health care program does this better. If you want to control costs, you either put responsibility in the hands of the consumers or in the hands of the government. When you put it in the hands of the consumer and prices get too high, then innovative ideas result to address the problem. When you put it in the hands of the government, you get pandering that results in atrocious policies such as price controls.

Have we really reached a point in our civilization when, as a people, we don't feel as if we are sufficiently capable (i.e. mentally tough, ambitious, innovative, industrious) to take care of ourselves and we need our pitiful government to care for us? Wow, how far we have wandered from what made America great. I guess if you do feel this way, then you need to go ahead and elect Obama because he'll take care of your poor pitiful self. (It quite frankly reminds me of the paternalistic racism that existed during the time of slavery and seems to still exist among liberal elites.)

Mitchell said...

Anon: Great points. The tyranny of the majority at work right? Screw those with higher incomes as long as more people get a tax cut. I'm paying 50% on the dollar now thanks to AMT and the CA rates.....I think I'll move to Sweden.

Don Pedro said...

Dear Anonymous:

For a good discussion of Obama's big picture view on the economy, see this article:

Fairness is recognized by economics as an important issue, going back to Adam Smith.

I can't tell what you're trying to say with "paternalistic racism." Are there really people who hate other people for their own good?

On health care, there's much more to say than I can address here. I see this as a fundamental question of values. I am with the great majority of Americans who believe that it is a problem that 1 in 4 kids in this country goes without health care. Your attitude towards those kids is "tough luck." I don't think there's anything I could say that would change your thinking.

Anonymous said...

His big picture: forcible redistribution of wealth. We'll take a disproportionate amount of wealth from rich people and distribute it among the masses. Do people even ask what the effect of this is on the economy as a whole? Whenever capital is moved or allocated in a particular way, there is an effect. What is it? It may, in fact, be incredibly short-sighted to assume, based on moral prejudices, that this redistribution is actually good for the economy and hence the masses. I'm not convinced that it is. Make the argument, not based on moral grounds, but based on facts.

Fairness may be an important issue, but if fairness is placed ahead of the health of the economy as a whole, then everyone suffers, even those at the bottom. I'm not sure Obama even thinks about this. He's too busy (along with most other liberals) trying to make himself feel good about himself by advocating for "fairness" without thinking about its effect on the economy as a whole (which effects the very people he's trying to help) and affects how people view themselves and the government. I prefer advocating for policies that promote 1) the health of the economy over someone's self-determined view of fairness and 2) an attitude of independence rather than dependence and victimization.

Paternalistic racism was an attitude that existed among many slave owners. It's the attitude that the poor pitiful slave was inherently limited in his ability to care for himself in a way consistent with civilized society; so the slave owner was really doing the slave a favor by keeping him and providing for his basic needs, for surely the poor black man could not really care for himself. It's called paternalistic racism because slave owners viewed themselves as almost father-like in their ability to provide for their poor hapless slaves, who weren't blessed with whiteness. Of course, this attitude existed to various degrees amongst slave owners. It's the same attitude, in my mind, that's present among liberals today. Poor people can't take care of themselves; so we, in our superior wisdom, will provide for them and teach them how to live. It's an affront to human dignity.

Aw, values: your determination of what is right and wrong. So what is right and what is wrong? You seem to consider it right for everyone to have good health care coverage. And that's a noble objective, but this is an optimization problem with many variables and you just assigned a weight of unity to one variable and zero to the rest. Because I realize that it is nearly impossible to get everything you want from a system, you need to set out clear pragmatic objectives and then optimize the system. For health care: quality, inherent cost-control mechanisms, affordability, access. How one chooses to optimize the system does affect the other stated objectives. I am convinced that more of these objectives are achieved when the government provides incentives for individuals to care for themselves rather than for the government to simply take care of people. Power to the consumer, not to the government. When you turn this power over to the government, the government can use it to manipulate and control people. No thanks.

By the way, for a pro-Obama blog, you guys are one of the best. Most of the others are just trash.