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AEI’s Brill & Viard on the Obama Tax Plan: Not Dishonest, Just Not That Interesting

August 16th, 2008 . by economistmom

Last Friday, the American Enterprise Institute’s Alex Brill and Alan Viard published this column on “The Folly of Obama’s Tax Plan,” in which they point out that all of Senator Obama’s proposed tax cuts for the middle class have the unfortunate side effect of raising marginal tax rates–effective tax rates on the next dollar earned–over certain ranges of the “middle-income” spectrum.  They were chastised by pgl over on Angry Bear for their “basic dishonesty.”  (UPDATE:  here’s the link to Jonah Gelbach’s post that inspired the thread on AB.)

But in defense of Alex and Alan, their column is not dishonest, and is probably not even intended to “distort” or even “confuse” (characterizations of the column used on Angry Bear and the Economists for Obama site that pgl quotes from).  It’s just that Alex and Alan are trying to make a big deal out of a small point, and a small point that has hardly any policy relevance. 

That point is that adding greater progressivity to a tax system (raising relative tax burdens on the rich or lowering relative tax burdens on the poor)–something Senator Obama is clearly trying to do–necessarily means raising marginal tax rates somewhere along the income distribution, in order to increase how steeply average tax rates rise with income.  In the case of refundable tax credits, these introduce progressivity by creating negative average tax rates (i.e., net income received rather than net taxes paid) at low income levels, but as income rises and the credits are phased out, the effective marginal tax rate equals the rate of reduction of the credit.  And if you boost the value of any existing tax credit but keep its qualifying ranges of income the same, well, you’re necessarily going to be phasing out more benefits faster, i.e., boosting the effective (positive) marginal tax rate.  Economists sometimes obsess about these phaseout marginal tax rates, because we like to worry about the adverse incentive effects of these tax rates on labor supply and saving–the idea that people might not work as hard or as many hours if they know that in earning more income, the value of their refundable tax credits will go down.  Even if the credits don’t go down by anywhere close to the amount of extra income–i.e., even without an effective marginal tax rate that’s less than 100%–economists worry that the “substitution effect” of this higher marginal tax rate (caused by the negative average tax rate) could be a decline in how much people work.

But this is a “problem” with any tax preference that’s targeted to a certain range of income (it doesn’t just apply to refundable tax credits), so there’s no way to avoid it without “de-targeting” the preference and spending a heck of a lot more money, on tax cuts for everybody.  The adverse economic effects of a much more costly tax cut, going to more people than is really justified given the purpose of the tax cut, far outweigh any potential benefit from reducing marginal tax rates and the possible substitution effects associated with the phaseouts of tax benefits.

This marginal tax rate criticism is often levied against the Earned Income Tax Credit (EITC) when economists feel like getting negative (i.e., insist on staying “dismal”) about a tax credit that otherwise delights most economists.  The EITC is a refundable tax credit that phases in at lower income levels, plateaus over a range of income, and then phases out over a higher range of income, as explained on this Tax Policy Center page.  Economists like the phase-in range of the EITC, where the rising credit with income means the marginal tax rate is negative–creating an incentive, rather than a disincentive, to work.  Economists dislike, however, or at least fret about, the phase-out range of the EITC, where the phasing out of the credit adds to the effective marginal tax rate.

But I say it’s much ado about nothing.  Theoretically, for the phaseout of a tax preference to adversely affect work incentives, it must be true that the worker is able to choose his or her hours of work in a continuous manner–that is, that I could choose to work 30 hours per week instead of 35, for example.  Some workers can do this, but many cannot.  It must also be the case that the worker is aware of the positive marginal tax rate faced at each decision point–aware that if he or she works an hour more, or 5 hours more, that his or her tax credit will go down by $__.  Most people are much more keenly aware of their average tax rates and their take-home pay, than their marginal tax rates and their net wage rates “at the margin.”

Empirically, studies on the EITC have shown that there’s just not much to worry about in terms of disincentive effects associated with the phasing out (i.e., the targeting) of tax credits.  A summary of recent empirical research on the EITC by the National Bureau of Economic Research explains that (emphasis added):

In Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply (NBER Working Paper No.11729), NBER researchers Nada Eissa and Hilary Hoynes review a large number of economic studies of the EITC and conclude that the main lesson from the accumulated evidence is that real responses to taxes are important. The second lesson is that, while the EITC stimulates people to join the work force, there is no evidence that it prompts them to work fewer hours. This difference, the authors write, “has several important implications for the design of tax-transfer programs and the welfare evaluation of taxation.

In other words, the implications for policy design are that we don’t need to worry about these potentially high marginal tax rates when tax credits are phased out, because:  (i) there’s no way to avoid them when targeting a tax credit, and (ii) there’s no evidence that the disincentive effects are significant (regardless of the theoretical potential).

So the point that Alex Brill and Alan Viard make in their column is not dishonest.  It’s just not very interesting (outside of a course in the microeconomics of public finance) and certainly not very policy relevant.

6 Responses to “AEI’s Brill & Viard on the Obama Tax Plan: Not Dishonest, Just Not That Interesting”

  1. comment number 1 by: Centrism is an ideology too

    Yes, pushing a point that is trivial in the WSJ is not a distortion. Come on - we know you are one of those centrist types and that means you think you have to defend both sides, but you have to call things for what they are if you wish to have credibility. This was a distortion, there’s no other way to put it (pushing a theoretical point as though it is true when there is no evidence for it is a distortion - they know there’s no evidence for it but they push it anyway, and you enable it - makes you look kind of foolish and naive to me - ask yourself why and where this appeared, i.e. who the intended audience is - this is to create talking points that can be cited as authoritative and you are helping to foster such distortions on the public - nice going. This isn’t an academic paper.)

    [There are other problems as well, the cherry picking, the failure to account for transfers, etc. - this was not an honest presentation of Obama's plan and you should understand that, but apparently don't. Please take a little more care next time. If you are going to nitpick to find nuggets of truth, nitpick the other way too.]

    Pushing movies that have a political underpinning - removing Social Secuirity - froma group that has not beeh honest in their presentations on this issue makes you an accessory. Why do you do that?

    Why are you helping these people distort the truth by minimizing what they do? If you can’t see the politics behind this stuff, how it’s intended to be used, why are you writing about it? (Never mind that you can find a smattering of truth to point to so you can say it’s not literally dishonest - that’s intentional - don’t be a rube, they know exactly how this will be used and you shoudl too - when the intent is to obscure what is actually true by pushing and highlighting other points don’t play along like som bumpkin new to this process - you ought to know better, you ought to understand how this plays into developing narratives. If you are going to appoint yourself as an analyst, act like one, and that means going beyond the literal, beyond the words on the paper and reading between the lines. Had you done so, you’d realize the distortion and dishonesty here.)

  2. comment number 2 by: DjK

    Good post.

    While we can presume that the folks at AEI hold conservative beliefs, I have to agree with the author of this post. There’s nothing dishonest about “The Folly of Obama’s Tax Plan,” but Brill and Viard do seem to add colorful descriptions when making their points, for example:

    While Obama has publicly embraced a tax rate of 40 percent for couples earning over $350,000, his tax policies would result in a staggering 45 percent effective marginal rate in the $110,000 to $120,000 income range for this family. That is 11 percentage points higher than under current law.

    The use of the word “staggering” adds emphasis, but it’s not dishonest, they’re just looking at the data.

  3. comment number 3 by: Patrick R. Sullivan

    pgl is incapable of writing a disagreement without including a few ‘dishonesty’, or ‘liar’ or some other libels. He can’t help himself.

  4. comment number 4 by: Tom Bozzo

    This is from Brill and Viard’s actual lede:

    “…he would raise marginal tax rates for many middle-income taxpayers, a bad move for anyone seeking to promote economic growth.”

    The first part of the statement is not the whole truth, and the second is a statement of opinion that does not necessarily follow from the truth or the first statement as written. The tendentiousness and careful elision of facts are legitimate targets for Gelbach and PGL.

    I can’t read their minds as to intent, and presumably neither can anyone else. However, “making a big deal about a small point” is inherently a distortion by your own assessment! The method of cherry-picking has also been extensively used to distortionary effect by the Bush Administration in characterizing its tax initiatives.

    As for the risk of confusion, my anecdote in lieu of data is that I have a highly educated but not very math-oriented parent who needs very careful explanation of how statutory rates, deductions, and other provisions affect her tax bills — and I’d guess she’s far from alone. Say “Obama will raise marginal tax rates on many middle-income taxpayers” and it seems likely some people will hear “Obama will raise taxes on middle-income taxpayers,” which would be false (and in another aspect of the game Brill & Viard are playing, it’s amusing to watch them dance around discussing the benefits of the provisions they’re criticizing).

  5. comment number 5 by: economistmom

    Tom: Yes, I would certainly agree that the Brill and Viard piece was misleading and misguided… I guess I draw a line between those characterizations and “dishonest,” but that’s my own subjective line. I know politics encourages all of us to push that line, but I was trying to take a bit of a step back to put it in more objective perspective. But yes, I was trying to give the authors the benefit of the doubt that their intentions were only to promote their world view without literally crossing into dishonesty, because knowing these authors, I do not think they are dishonest (just sometimes misguided)… ;)

  6. comment number 6 by: jonah gelbach

    Hi Dianne

    I’ve just now seen a link to this post over at AB, and as the author of the E4O post that Angry Bear quoted (how bout a link, btw?), I think I ought to comment here.

    A few observations.

    First, the SUBTITLE of the Brill-Viard article is as follows:

    “Senator Obama’s proposed ‘tax cuts for the middle class’ are actually marginal rate hikes in disguise.”

    One doesn’t use quotations around a phrase, a la ‘tax cuts for the middle class’, if one isn’t trying to convince people that the phrase is inapt. Moreover, one doesn’t say “X is actually Y” if one is conceding X. I don’t see how one can read this subtitle as anything other than a claim that “Obama’s claimed tax cuts are really tax increases”. The fact that the claim is demonstrably false doesn’t mean they didn’t make it; in fact, that’s my point.

    Anyone interested can read my original post at E40, as well as two follow ups (titles are “Obama’s Tax Plan and Basic Honesty”, “My Response to Viard”, and “Tax Plans: Some Useful Graphs”; I can’t seem to get links to work in your comments).

    Leaving the subtitle aside, I do think that when authors push a trivial point (to use your phrasing) under the guise of discussing a larger one, cherry-pick an example, and left-censor their graph at 25k, which probably excludes something like a fourth of U.S. households (just guessing), they are in fact being dishonest.

    I think our politics has defined dishonesty down, to mean only statements of the form “X is true” when X can be shown not to be true. In fact, it is dishonest to use trivial point Y together with the knowledge of your audience’s lack of economic sophistication (read: the vast majority of journalists and blog readers) to try to convince them of X, when you know that X is not true.

    Pushing a trivial point to confuse about a larger one is a tried-and-true part of the dishonesty toolkit. It’s bad enough when “political operatives” do it. But when professionally trained economists, even those at propaganda shacks like AEI, do it, then they deserve to be called on it. They should be called dishonest, and their credibility should be questioned thenceforth. This would seem to me to be a minimal standard of professional quality control, and that’s why I wrote the post I did, as forcefully as I did.

    I’d add another point, as well, concerning your response to Tom B, above:

    I was trying to give the authors the benefit of the doubt that their intentions were only to promote their world view without literally crossing into dishonesty, because knowing these authors, I do not think they are dishonest

    I don’t know either author personally (though I did once cite a paper of Viard’s). For that reason, it’s surely easier for me to draw the conclusion I do. But if you concede that “the Brill and Viard piece was misleading”, then the only other possible conclusion for you is that they are really sloppy economists, who just happen to have been sloppy in precisely the way most likely to “mislead” unsophisticated readers into believing something that (a) isn’t true and (b) lines up with the authors’ policy preferences. If this isn’t dishonest, then at best it’s professional negligence. I think calling it “misguided”, and for that matter focusing on the authors’ personal qualities, misses the point. “Misguided” is what you call a love for the gold standard, and in my book, one ought to judge a person’s honesty on the basis of the honesty of what they write, not the other way around.

    Just my 2 cents.

    Jonah