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The Obama Tax Plan (or How to Look Good at the Dance)

August 14th, 2008 . by economistmom

I may be kind of old and past my dancing days now, but I still remember the trick to looking good at those school dances, even when you’re not “the total package”…

When you’re just standing there, stand next to the ugly person.

When you’re dancing, dance near the klutzy person.

And when you’re engaging in conversation, converse around the stupid person.

Now, it may still be that the Obama tax plan would be voted the “belle of the ball,” but it wouldn’t be because of its beauty in an absolute sense, only because of its beauty measured relative to some less attractive standards.  The Obama campaign likes to compare different aspects of their tax plan to the different less attractive standards around the room.  This is what’s known among budget geeks as a “baseline issue”–but what might be easier to understand as ”how to look good at the dance.”

(In a nice article by Lori Montgomery in last Sunday’s Washington Post, Len Burman of the Tax Policy Center referred to this as a “yardstick” issue.)

So I bring this up because in today’s Wall Street Journal, Obama advisors Jason Furman and Austan Goolsbee speak of the beauty of the Obama tax plan.

The Obama tax plan is both a net tax cut, relative to (ugly) current law…

Overall, Sen. Obama’s middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000, making the proposal as a whole a net tax cut and reducing revenues to less than 18.2% of GDP — the level of taxes that prevailed under President Reagan.

…and a fiscally-responsible, tax plan, relative to (stupid) Bush tax policy extended…

Sen. Obama is focused on cutting taxes for middle-class families and small businesses, and investing in key areas like health, innovation and education. He would do this while cutting unnecessary spending, paying for his proposals and bringing down the budget deficit.

And the Obama tax plan is fair in its redistribution of income, relative to the unfair (klutzy) tax changes since 2001

Sen. Obama believes a focus on the middle class is appropriate in the wake of the first economic expansion on record where the typical family’s income fell by almost $1,000. The Obama plan would cut taxes for 95% of workers and their families with a tax cut of $500 for workers or $1,000 for working couples…[H]e would repeal a portion of the tax cuts passed in the last eight years for families making over $250,000…In an Obama administration, the top 1% of households — people with an average income of $1.6 million per year — would see their average federal income and payroll tax rate increase from 21% today to 24%…

…yet also keeps top tax rates relatively low (beautiful) compared with the tax rates of the (already beautiful) late 1990s…

But to be clear: He would leave their tax rates [those of families over $250,000] at or below where they were in the 1990s…[T]he top 1%…would see [an] average…tax rate…less than the 25% these households would have paid under the tax laws of the late 1990s.

So I have to wonder when Jason and Austan hint at the economic smartness of the Obama plan by citing a Brad DeLong estimate of the economic cost of the (dumb, or at least “fiscally reckless”) McCain tax plan due to its effect on the federal debt:

Sen. McCain has put forward the most fiscally reckless presidential platform in modern memory. The likely results of his Bush-plus policies are clear. As Berkeley economist Brad Delong has estimated, the McCain plan, as compared to the Obama plan, would lower annual incomes by $300 billion or more in real terms by 2017, costing the typical worker $1,800 or more due to the effect of large deficits on national savings and thus capital formation.

… If that’s really ”as compared to the Obama plan”, then isn’t there an extra economic cost (beyond the revenue cost) associated with the level of debt added by the Obama plan, too?… in other words, relative to current law?  If this calculation is linear, for example, and if we use Tax Policy Center estimates for the cost of the McCain and Obama tax plans (I know the Obama campaign is using a much larger figure for McCain), then the Obama tax plan adds “just” $2.8 trillion to the federal debt over ten years (not counting interest), while the McCain tax plan adds $4.2 trillion.  So Obama’s plan costs two-thirds what McCain’s plan does.  Does that mean (doing the algebra) that Brad DeLong would calculate that the Obama tax plan would involve $600 billion in reduced annual incomes due to the reduction in national saving–which is $300 billion less than the perhaps $900 billion under the McCain tax plan?

So I guess I need to ask Brad:  is the Obama plan still “smart” and “pretty” on the economic growth front in an absolute sense, and not just compared with the McCain plan–you know, that ugly, dumb thing?  ;)

6 Responses to “The Obama Tax Plan (or How to Look Good at the Dance)”

  1. comment number 1 by: Gerald Prante

    While there is no doubt that McCain’s plan would add to the deficit more than Obama’s, the tax cuts that each is proposing that creates those deficits could matter too.

    Running the deficit up by flushing money down a toilet does not have the exact same long-run economic harm as running up the deficit (by the same amount) by cutting marginal tax rates.

    So if you consider for example the war in Iraq to be a waste (as DeLong probably does), then if that money was spent on some better spending item or on tax cuts that promoted long-run growth, even if the static deficit cost was held constant, long-run economic growth would be better than the return we receive from the alternative (the war).

    The same could be true for Obama’s tax plan vs. McCain’s. Obama’s tax plan, which for 2009 relative to baseline is mostly just redistribution and fix AMT, could have a higher costs per $1 of static deficit than McCain’s, which is focused more on lower taxes for capital and high-income earners who are more sensitive to taxation than others. (In short-run, Obama’s may be better for macroeconomy because redistribution from those with low MPCs to high MPCs will boost consumption.)

    For example…suppose true fundamental tax reform were proposed by Obama or McCain while the other stayed with his current proposal, yet the fundamental tax reform static score still had the same static deficit figure as the other candidate’s tax cut. Nobody would say that the two deficit’s had the same adverse economic costs.

  2. comment number 2 by: pgl

    The high school dance analogy is cute but c’mon, I bet the fellows in your school were lining up to dance with you!

  3. comment number 3 by: economistmom

    UPDATE: Brad responded via a post on his blog, here:
    http://delong.typepad.com/sdj/2008/08/stand-next-to-t.html

  4. comment number 4 by: pgl

    When I read Brad’s 1st post on this - it struck me that he was saying Obama’s fiscal policy was not quite the fiscal restraint pro-growth one that the deficit hawk Democrats might want but it wasn’t as bad as the anti-growth fiscal policy being put forth by McCain.

  5. comment number 5 by: Jim Glass

    Another interesting point in the WSJ piece — apart from Obama’s people picturing him as a Reagan-type tax cutter, invoking Reagan’s name twice (approvingly!), while emphasizing that he will cut taxes on net — is that Obama’s universal health care program now seems to have become free.

    Krugman was unhappy about Obama’s unwillingness to raise enough taxes to pay for health care back when he thought Obama’s plan was raising $700 billion of new revenue over 10 years. That additional $700 billion was…

    “not enough to pay for universal health care, which was supposed to be the overriding progressive priority in this election. Why doesn’t Mr. Obama propose raising more money?”

    Now that Obama’s people are saying he actually will reduce revenue … one can only imagine.

    (Remember how Krugman told the Asia Times “We should be getting 28% of GDP in revenue”, ten points more than now — which would be something! — even without national health care.)

    A bit of irony from Obama’s people in the WSJ piece is that after they solemnly state:

    “Sen. Obama believes that responsible candidates must put forward specific ideas of how they would pay for their proposals.”

    … they promptly go on to attack McCain for doing just that — telling how he would pay for his health care plan.

    “Sen. McCain’s plan does include one new proposal that would result in higher taxes on the middle class. As even Sen. McCain’s advisers have acknowledged, his health-care plan would impose a $3.6 trillion tax increase over 10 years on workers … Even after accounting for Sen. McCain’s proposed health-care tax credits, this plan would eventually leave tens of millions of middle-class families paying higher taxes.”

    Meanwhile Obama’s universal health care plan is free — comeplete with a tax cut bonus! No unpopular tax cost to attack there.

    Wasn’t somebody promising a “new” kind of politics? Is this it?

    It’s also interesting how people who are reputable balanced economists through the rest of their lives during the election season start writing op-eds that read like they could have come from a team of trial lawyers in the middle of a case.

  6. comment number 6 by: Barry

    “It’s also interesting how people who are reputable balanced economists through the rest of their lives during the election season start writing op-eds that read like they could have come from a team of trial lawyers in the middle of a case.”

    I’ll bet that you don’t say that to Greg Mankiw’s face, though.