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What Would Really Happen to Tax Burdens Under President Obama vs. President Romney?

August 6th, 2012 . by economistmom

Last week the Tax Policy Center (TPC) released this distributional analysis of the Romney tax plan, exploring how the plan could be made revenue neutral as Romney has claimed it would be. The TPC analysis found that it is impossible to pay for Romney’s proposed additional tax cuts (which are skewed heavily toward the rich) with base-broadening revenue offsets (which according to the Romney plan cannot include increasing the taxation of capital income) without increasing tax burdens on net for most Americans. (I quickly summarized what I took as the main findings of the TPC analysis in my previous post.)

By later the same day the Obama campaign had seized the moment by building the TPC calculations into an Obama “tax calculator” where any household can plug in their own income level, marital status, and number of children, and compare what their tax burdens would be under Obama versus under Romney.

The Obama campaign’s tax calculator produces honest numbers based on TPC distributional tables, but its presentation is confusing. It makes Obama tax policy look like it gives tax cuts for everyone, even the rich (which is indeed true relative to current law) and to make Romney tax policy look like it raises tax burdens on the middle class (which is indeed true relative to Obama policy, a different baseline). It seems to purposefully switch the baseline–or march from one to another–to come up with the most politically effective punch line that Romney wants to raise taxes on most Americans. The truth is that both Romney and Obama want to cut taxes by a lot relative to current law; it’s just that on net, Romney will cut taxes relatively more for the rich and less for everyone else (and more on average). The Bush tax cuts that Obama’s calculator touts as the benefits of Obama’s first-term tax cuts are relative to the current-law (no Bush tax cuts) baseline. The Obama tax cuts that would happen in 2013 are also relative to the current-law (no Bush tax cuts) starting point. But the “Romney tax plan” numbers are relative to an Obama policy baseline, accurately labeled in the Obama tax calculator as “compared to President Obama’s plan.” For the vast majority of Americans (the 95 percent or so with incomes below $250,000), the number for “under Romney” will show a tax increase for them. Relative to current law, however, Romney’s tax proposal would cut taxes for the middle class–just not by as much as Obama would. And both Romney and Obama plan to cut taxes for the rich; it’s just that Obama would cut them less than Romney would.

This strikes me as like shopping for a new car and comparing two cars in the dealer’s lot. One car has a sign on it that says it gets 25 miles per gallon (mpg). The car next to it has a sign that says “10 mpg—relative to the first car. ” Maybe for some reason the dealer wants to get rid of the first car more than the second, and that’s why he chooses to emphasize the relative, plus “10 mpg” of the second rather than the absolute 35 mpg that the second car actually gets. Most buyers wouldn’t catch the “relative to” comparison—and would reasonably expect the measures to be based on the same absolute scale (no matter the fine print)—and would thus incorrectly conclude that the second car had (absolutely) poor fuel efficiency when in fact it has relatively better fuel efficiency.

I admit this is not a perfect analogy to the Obama tax calculator, however, because there’s no such thing as negative miles per gallon, and a middle-class family’s tax burden under Romney would be higher than under Obama (so higher relative to Obama policy), but would still go down compared with current law. Conversely, a rich household’s tax burden under Obama policy would be relatively higher than under Romney policy, but would still go down compared with current law. The Obama tax calculator (conveniently) emphasizes how Obama policy in 2013 would compare with current law, because that suggests tax cuts for everyone—even the rich. By switching to the Obama-policy baseline only in the last step of comparing Romney policy to Obama policy, the calculator emphasizes that Romney raises taxes on the middle class (relative to Obama policy), while avoiding calling attention to the fact that Obama raises taxes on the rich (relative to Romney and relative to current policy extended).

For example, the Obama tax calculator highlights these three figures about the tax burdens facing a married, two-child household with $100,000 in annual income—emphasis added:

“Your Tax Savings during President Obama’s First Term, 2009-2012”: $5,600
“Tax Savings Under Obama, 2013”: $3,999
“Tax Increase Under Romney, 2013…Compared to President Obama’s plan…”: $1,339

…but this really means that under Romney this family would still get a tax cut in 2013, compared to current law, of $3,999 - $1,339 = $2,660. In other words, an “apples to apples” comparison of tax cuts measured against the same yardstick (baseline) would compare a $3,999 tax cut under Obama with a $2,660 tax cut under Romney. The smaller tax cut under Romney is because reduced tax preferences (those “base broadeners” aside from those affecting capital income taxation) would be used to pay for further tax rate reductions at the top of the income distribution.

For a household with $500,000 in annual income, the Romney tax change is in the opposite direction, because Romney would cut high-income households’ taxes even further than under President Obama’s plan (which extends the Bush tax cuts except for the highest brackets). The Obama calculator returns these three figures (again, emphasis added):

“Your Tax Savings during President Obama’s First Term, 2009-2012”: $8,676
“Tax Savings Under Obama, 2013”: $8,295
“Tax Savings Under Romney, 2013…Compared to President Obama’s plan…”: $36,319

…and this means that the $500K family would get a $8,295 tax cut under Obama in 2013, compared with current law, but a much larger tax cut under Romney, of $8,295 + $36,319 = $44,614, also compared with current law. A different “apples to apples” comparison could have compared tax changes under both candidates to the policy-extended baseline, in which case there would not be any tax savings under Obama for this $500K household but instead a large tax increase. (This is why the choice of the baseline matters and was not likely random in this campaign material; even President Obama would prefer to avoid showing tax increases, and even on the rich.)

My bigger criticism about the Obama tax calculator is that it ignores the distribution of the burden of deficit financing—as Bill Gale and Peter Orszag emphasized way back during the Bush Administration about the Bush tax cuts. (The lesson from that analysis was that if deficits at least eventually have to be offset by future tax increases or spending cuts, then the distribution of the burden of those future fiscal policy changes should be considered, not ignored, in the policy choice to deficit-finance a current tax cut.) By ignoring the cost of deficit financing any tax cuts (even those “fiscally irresponsible” Bush tax cuts!), the Obama calculator implicitly suggests that there is no cost of tax cuts if you deficit finance them. Instead, the calculator scores a monetary cost if the tax cuts are paid for, but no monetary cost if they are not paid for. This is not the message that encourages politicians to say “ok then, I’ll propose fiscally-responsible tax cuts from now on.”

The Obama tax calculator calculates the benefits of the extended Bush tax cuts without the burden of deficit financing and claims those (ironically) as the good of Obama tax policy. They then use the net burdens of the Romney plan as estimated in the TPC analysis (which average to zero across all households but burden middle income families on net) to claim Romney’s supposedly-paid-for plan raises taxes while the Obama (Bush-extended, deficit-financed) plan reduces taxes.

This gets back to my even broader concern about the Obama campaign’s emphasis in their touting of the TPC analysis. (To be clear, I mean no criticism of the TPC analysis itself here.) The Obama campaign has jumped at the chance to highlight the burden of the implicit Romney revenue offset–which should be criticized because of its adverse distributional effect, but not because it is an offset, nor because it is a base-broadening offset. In my view, the most important and very objective, basic-math lessons of the TPC analysis are (i) we can’t afford the Romney tax cuts, and (ii) it’s not possible to offset the cost of those tax cuts while taking capital income tax expenditures off the table without creating a very regressive tax reform on net. In an ideal world this TPC analysis would lead policymakers on both sides of the aisle to scale back their tax cutting plans and/or restructure the offsets to make for a more progressive package. Unfortunately, the Obama campaign’s political capitalizing on the TPC analysis has probably resulted in the Romney campaign saying to themselves now: “gee, we shouldn’t have proposed a fiscally responsible version of our huge tax cuts for the rich; we should have just said we would deficit finance it.”

In this PBS Newshour segment where Judy Woodruff speaks with one of the authors of the TPC analysis, Bill Gale, and the Tax Foundation’s Scott Hodge, at one point Hodge actually suggests it may be wrong to assume Romney would pay for his proposed tax cuts at all (emphasis added):

SCOTT HODGE: …There are many ways in which Romney could fill out the details of his plan. They of course are not forthcoming with that, because they would like to keep to a big-picture approach. So we have to be very careful about reading too much into this, because it really is not the Romney plan.

(CROSSTALK)

JUDY WOODRUFF: All right, so filling in a lot of assumptions, what about that?

BILL GALE: Let me respond to that.
It’s correct that Governor Romney has not specified all the details of his tax reform plan. He has specified the goodies, the tax cuts, but he’s not specified how he will pay for them. If he would do so…

(CROSSTALK)

SCOTT HODGE: He may not even pay for them. He may decide that we are going to scrap revenue neutrality.

Indeed, why should any politician propose a fiscally-responsible, as opposed to deficit-financed, tax cut then? By offsetting the cost of one’s tax cuts, whether with specific policy or not, your opponent will attack you on the burden of the offset on whichever households would bear that burden. In contrast, if you don’t offset the cost, you can claim all households win.

It’s a shame that Romney’s particular version of base-broadening tax reform might be a bad-enough version such that the more general (and wise) strategy of tax base broadening for deficit reduction—the kind of tax reform recommended by all of the bipartisan deficit-reduction groups—has now been tainted. Both the President’s commission (Bowles-Simpson) and the Bipartisan Policy Center’s task force (Domenici-Rivlin) showed that we can broaden the tax base, lower tax rates, and raise revenue—and yet still maintain or improve the progressivity of the overall tax system. But the TPC analysis of the Romney plan makes clear that going further with tax rate cuts, even beyond extension of the Bush tax cuts, is not feasible in any practical sense if we are not willing to pay for it by giving up the major tax expenditures that currently benefit all taxpayers very broadly, and is not palatable from a distributional perspective if we’re not willing to increase, not decrease, the taxation of capital income.

The TPC analysis of the Romney tax plan should be taken as a good teaching moment to help policymakers on both sides start constructing better tax policy. But both campaigns have just used it to ramp up their political posturing and sharpen their blame games. Let’s hope that this blow to the idea of fiscally-responsible, progressive tax reform is purely superficial and temporary and does not prove deadly.

38 Responses to “What Would Really Happen to Tax Burdens Under President Obama vs. President Romney?”

  1. comment number 1 by: AMTbuff

    My bigger criticism about the Obama tax calculator is that it ignores the distribution of the burden of deficit financing

    This is even more true of stimulus spending: If you aren’t receiving stimulus money you are being taxed. People intuitively grasp that.

    The TPC authors made a mistake wading into an election year tax debate with a single questionable baseline. The baseline choice is the primary determinant of the result of a tax comparison.

    TPC should not have included ACA taxes in its baseline. They are not currently charged, and like Social Security taxes they are earmarked for use outside the historical scope of our income tax system.

    TPC should have made its baseline crystal clear and provided results for multiple baselines. That would have isolated the baseline-dependent portion of the difference.

    it seems to me that TPC is spending down its reputation for objectivity. We should impose an inheritance tax to capture some of it before they spend it all.

  2. comment number 2 by: SteveinCH

    (i) we can’t afford the Romney tax cuts, and (ii) it’s not possible to offset the cost of those tax cuts while taking capital income tax expenditures off the table without creating a very regressive tax reform on net.

    Good article Diane with the exception of this part. On point 1, if we cannot afford the Romney tax cuts (from the current law baseline), I assume we also cannot afford the Obama tax cuts (from the same baseline). After all, the difference is less than 0.5% of GDP. Either both are affordable or neither is.

    On point 2, in a column where you stuck very close to facts, the use of the term “very regressive” is unfortunate. “Very” is clearly a value judgment with no basis in fact. If I choose to call it slightly regressive, what difference does it make, none at all really.

    I’d also point out to AMT’s point on baselines, the entire discussion on the distribution of taxes seems to conveniently ignore the incremental taxes on “the rich” that have already been passed (but not yet implemented). Further, I’d also like to point out that the notion of fairness is one of relative burdens…somehow the massive drop in tax rates at the middle and bottom of the income distribution never come up in the discussion of fairness. When we take the relative effective tax rates of the top 1% back to where they were under Carter, maybe we’ll be ready to have a discussion.

    Lastly, I want to reiterate, there is no way to cut tax expenditures and produce a more progressive tax table unless you (1) rebalance the rate table to raise rates on the wealthy or (2) continue the silliness of classifying the rate on capital income as a tax expenditure. Because of course by the definition implied, any rate other than the highest rate must be, by definition a tax expenditure. Oh the size of the tax expenditure of the 25 percent bracket…it dwarfs all the others.

  3. comment number 3 by: Vivian Darkbloom

    Further to the baseline point: Per Romney’s “plan”, there is to be an across the board 20 percent cut of marginal rates. Romney also makes clear that he wants to repeal ACA. But, what is not clear from the Romney plan is whether the 20 percent cut includes the ACA surcharges. The TPC might be correct in its assumption, but clearly an assumption it is. And, I’m still not entirely certain what the TPC has done. Does anyone know what footnote 6 means? Does this completely reverse what was said in the main text of that paper?

    Second, as repeatedly pointed out here, at the TPC and by the administration’s key advisors, “tax expenditures” are more like “spending” than like tax reductions. However, when it comes to an issue such as this one, tax expenditures are treated as clear reductions in taxes, so that eliminating them is a *tax increase* rather than a *spending reduction* and the narrow “distributional effects” follow accordingly. I never thought Grover Norquist would have such solid support among the progressive community.

    If one were to consistently treat tax expenditures as “spending”, then the distribution of the *tax* consequences of the Romney favor those with income under $200,000 (married) because they are the only cohorts getting the reduction on investment income.

    As to the distribution of “spending cuts”, “tax expenditures” and otherwise, then one also has to look at what Romney proposes to do to the two largest spending programs. Per his website:

    On social security:

    “Second, for future generations of seniors, Mitt believes that benefits should continue to grow but that the growth rate should be lower for those with higher incomes.”

    On Medicare Romeny proposes to introduce a premium support system:

    “Lower income seniors will receive more generous support to ensure that they can afford coverage; wealthier seniors will receive less support”.

    It is most likely that these two provisions would more than eliminate the distributional advantage to the “rich” of those tax expenditure spending cuts. And, the “Obama plan” proposes exactly no spending cuts on the “rich” through these two programs. Not very progressive, that.

    Of course, another way of achieving the same result would be to judge the distributional effects of policy not only on spending or taxing separately, but on the combination of the two such that these definitions become less important. This artificial delineation between taxing and spending is perhaps even more important here than the choice of baseline.

    But I guess that is too difficult for the TPC, much less the public at large to grasp.

  4. comment number 4 by: Ben

    My problem with the tax calculator is this:

    Put in 197,499 and then 197,500. Look at the difference. The results for Romney are wildly different and even the results under the two obama plans are far too different. That one dollar difference isn’t going to skew actual taxes that much.

  5. comment number 5 by: Brooks / Gordon

    A question for AMT, Steve, Vivian (and anyone else),

    Do you consider Social Security and Medicare payroll taxes to be purely taxes paid into a transfer payments system (like welfare for all seniors), or at least to some degree like paying into a pension plan (or in some other way paying now in exchange for future payments as benefits later)?

    For the purposes of the above question, leave aside the element of disability insurance.

  6. comment number 6 by: Vivian Darkbloom

    Brooks,

    It is like “tax expenditures”. There are elements of both. Both Social Security and Medicare are “progressive” programs. Those with low lifetime earnings and/or lower earnings during retirement benefit most from those programs. Numerous studies show how “progressive” these programs are. If Romney gets his way on the spending side of the ledger, then these programs would likely become much more progressive. Gene Steuerle has done a lot of work on this and a few years back the Social Security Administration issued a study “Is Social Security Progressive”, a rather rhetorical title along the lines of “Is the Pope Catholic”.

    Ironically, “progressives” are loathe to admit that these programs are anything but “insurance”. So, persons with low lifetime earnings have paid something into the system but get, on average, much more in return on his investment than those with high lifetime earnings, the latter group subsidizes the former, but the former group can be comfortable knowing that “we paid for our benefits”.

    it is one of the ironies of political life that Romney proposes to make these systems more progressive by cutting benefits for high earners even more, while the Dem’s want to retain the status quo. Of course, you won’t see the results of this in any “distributional analysis” of the tax plans because, of course, there is suddenly such a clear line between taxing and spending.

  7. comment number 7 by: Brooks / Gordon

    Thanks Vivian.

    So you are saying it is partly like paying now for future benefits one will (likely) receive later. I’d like to see if Steve, AMT, or anyone else views it as not at all like that, but rather purely as a transfer payment program, like welfare for all seniors.

    By the way, for those who do see it as partly or fully something one pays into in exchange for future benefits if and when they reach retirement age, I don’t see why they would call that “insurance” as opposed to a sort of pension program. I know what they say — it’s insurance against outliving your savings, or something to that effect — but it still seems odd to use that term, when pension program seems much more fitting, (regardless of differences vs. private sector pension programs).

  8. comment number 8 by: Steveinch

    Brooks,

    My answer is simpler than Vivian’s I think. I am happy to have the discussion either way. My own view is that they are just taxes, no different than any other taxes and that there is no paying for future benefits because the money is spent now. As a consequence, I think the right way to do tax distributional analysis is to include payroll taxes in the analysis.

    In this construct, taxation becomes less progressive. I agree with Vivian’s assessment of the system for SS if you look at it as a prepaid pension system in whole or in part. Medicare to me almost must’ve looked at as a pure transfer program since Medicare payroll taxes are woefully insufficient ton fund Medicare. But in this construct, the Federal tax code is already massively progressive and has become much more so over time.

    But I admit I do get irked by people who want to include FICA in their tax distribution analysis and maintain that SS and Medicare have dedicated funding schemes. You can’t have it both ways

  9. comment number 9 by: Vivian Darkbloom

    Brooks,

    Viewed as a whole, neither program is purely “insurance”, nor is it a “pension” as those terms are normally understood. Because these programs are hybrids, you cannot accurately use either term. If I buy an insurance policy, there is no built-in transfer among the pool of insureds from one income cohort to another. Likewise, with a “pension” other than the actuarial element of how long one lives, there is no transfer from one income cohort to another.

    I agree, by the way with Steve, that consistency is what counts. When it comes to whether a person pays “taxes” progressives have a ready answer that they do—payroll taxes. When it comes to the question of whether they receive “welfare”, then of course it is not a general tax that is paid; it rather like a premium that has funded their own benefit.

    As far as the distributional analysis, this is one of the reasons why a one-sided analysis of taxing or spending is misleading. As with the Romney “plan” , any meaningful distributional analysis needs to take both into account. If you do that, labels then become rather irrelevant.

  10. comment number 10 by: Brooks / Gordon

    Thanks Steve,

    You write:
    My own view is that they are just taxes, no different than any other taxes and that there is no paying for future benefits because the money is spent now. As a consequence, I think the right way to do tax distributional analysis is to include payroll taxes in the analysis.

    You may have anticipated at least the framework of where I’m going with this.

    Like most people (I think) who discuss such matters, I regard refundable tax credits as essentially spending (like a welfare check), based on the premise that it refers to money people receive above what they paid (or would have paid) in federal taxes on their income (i.e., the individual has a net gain).

    But if we take your holistic view of federal taxes on income — grouping payroll taxes with (other) income taxes — then insofar as an individual’s refundable tax credit does NOT exceed what he paid in payroll taxes (at least for SS and Medicare), then he is still paying some federal taxes on his income (or netting out to zero), meaning that the refundable tax credit (assuming he is eligible for it based on his level of earnings, directly or indirectly) is, in effect, a cut in the tax rate on his labor income. Right?

    I don’t know if one’s refundable tax credit can exceed payroll taxes paid, or if so, what portion of them do. Does anyone here know?

  11. comment number 11 by: Brooks / Gordon

    Above where I refer to the refundable tax credit exceeding (or not exceeding) payroll taxes paid, I should have said exceeding (or not exceeding) payroll taxes paid plus any income taxes paid (or the liability before the credit). Again, I’m referring to whether or not the individual nets out positive from the refundable tax credit less all federal taxes paid on labor income (including payroll taxes).

  12. comment number 12 by: Brooks / Gordon

    Just in case it’s not clear what I’m talking about, I’ll illustrate, using numbers I’m just making up for simplicity:

    Joe’s gross income for a year is $3,000.

    He pays, say, $200 total in SS and Medicare payroll taxes (which comes out to 6.7% of his labor
    income, just for this illustration, not the real world tax rate).

    He has no taxable income after his personal exemption, and thus has no income tax liability. (The personal exemption is, in effect, just a tax rate reduction, and in his case it means that the income tax rate at his level of income is zero.).

    Thus, if we view federal taxes on his labor income holistically (as I think Steve is saying he does), his tax rate is, in effect, 6.7%.

    But at that level of gross income, he receives (just hypothetically) a $150 refundable tax credit, meaning he has paid a net $50 of federal taxes on his labor income, which would be 1.7%

    Isn’t that $150 refundable tax credit (in this hypothetical case) essentially a tax cut — a reduction in the federal tax rate on his labor income from 6.7% to 1.7% ?

    And per that holistic view of federal taxes, wouldn’t it be wrong to regard the refundable tax credit in this case as similar to spending (as a sort of “welfare”) rather than as a tax cut?

    I’m not saying I share Steve’s apparent view, only that if one has that view, I believe the above perspectives follow from it.

  13. comment number 13 by: AMTbuff

    If the objective is to categorize certain taxes and benefits so as to say the problem is over here not there, I object to that approach. Everything must be on the table. No clever accounting justifies removing one program or one tax from comprehensive cost-benefit analysis.

    That said, I regard SS taxes, for example, as part of means testing. These taxes act as an offset to or as a reduction of future benefits, often to the point where the net present value is negative. To the extent that one believes the promised future benefits will not be paid, SS taxes are pure taxes.

    If analysts were willing to admit that promised benefits are worthless and might as well be voided now, we could make quick progress toward sustainable spending. SS taxes would be treated as taxes, leading to their immediate reform.

  14. comment number 14 by: Brooks / Gordon

    AMT,

    I’m unclear on your answer to my question — i.e., whether you view SS and Medicare taxes as purely part of a transfer payment program (welfare for seniors) OR view these taxes as, in effect, to at least some extent, the individual purchasing an individual entitlement to receive cash benefits later. I think these two options are mutually exclusive, and I think they are probably exhaustive for purposes of this question, so which is your view?

    You can see in my comments above my (narrow) purpose in asking this question. If these taxes are viewed as purely the funding of a transfer payment program rather than as the individual purchasing (in effect) some sort of future benefits to which he will be entitled by virtue of having paid those taxes, then refundable tax credits that do not result in the individual netting out ahead (net of all federal taxes paid on labor income, including SS and Medicare taxes) are properly seen as tax rate cuts rather than as (”welfare”) spending. See my example with “Joe” above.

    So again, which is your view? And if one has the view (which Steve seems to have) that these are “just taxes, no different than any other taxes and that there is no paying for future benefits”, doesn’t my conclusion follow, at least in a case such as Joe’s?

  15. comment number 15 by: AMTbuff

    They are transfer programs in which the ostensibly but not actually earmarked taxes represent means testing. I don’t believe that individuals are purchasing anything because (a) the government has no obligation to honor current levels of benefits and (b) the government does not have the ability to honor them either. The tax money is spent currently and it’s gone forever.

    Your question has a “Threat or menace?” flavor. These taxes are promoted as coupled to benefits which will not be forthcoming. Your question carries the implicit and I believe incorrect assumption that the programs will not be terminated in a default. Therefore the best answer to your question is “neither”.

  16. comment number 16 by: Brooks / Gordon

    AMT,

    Perhaps there’s something I’m missing in your responses, but I don’t see why you say feel you have to say “neither”, nor can I see why you say “neither” after having just (apparently) chosen one of the two. Perhaps you are reading into my question more than there is, or are trying to anticipate something larger and are therefore making this far more complex than (I think) it is.

    It sounds like you are saying (at least) in your first paragraph that you have the same answer as Steve, who apparently said his view is that those taxes are purely for transfer payments, NOT even partly like the individual paying for future benefits to which he is entitled by virtue of having paid those taxes. Is that what you are saying or not??

    Re: Your question carries the implicit and I believe incorrect assumption that the programs will not be terminated in a default.

    I don’t think I’m making any such assumption, implicit or otherwise. I’m just asking if you think those taxes are purely for transfer payments (essentially welfare for current seniors), or for that matter anything other than even partly or in any way purchasing something for one’s self (entitlement for future benefits). And the reason I’m asking is because, as I’ve asserted quite clearly and repeatedly, if one takes the former view, then it seems to follow that insofar as someone still ends up paying some federal tax on his labor income, even if only via payroll taxes for SS and Medicare (etc.), his refundable tax credit is a tax cut and not like spending (not like welfare or any other kind of spending).

    If you can give me a straight answer on which way you view those taxes, hopefully you can then tell me if you agree or disagree that it leads to that conclusion re: refundable tax credits.

    So please try to give a straight answer to the first question, and then the second.

  17. comment number 17 by: Brooks / Gordon

    AMT,

    As follow-up to my reply above, let me try to state my first question even more simply:

    Do you think someone paying SS and Medicare taxes is, in effect, purchasing a personal entitlement to future benefits, or not?

  18. comment number 18 by: Brooks / Gordon

    …and if your answer is “not”, then aren’t you saying, as I believe Steve is saying, that SS and Medicare taxes are, like income taxes, simply taxes that fund federal spending, not any sort of paying to entitle one’s self to future benefits?

    And if the former is indeed your view, doesn’t that mean that, unless one’s refundable tax credit is greater than his income tax liability (or income taxes paid) plus what he paid in SS and Medicare payroll taxes, the refundable tax credit is appropriately viewed as a cut in the federal tax rate on his labor income, and NOT as “welfare” or any other type of “spending”?

  19. comment number 19 by: Vivian Darkbloom

    Again, I think drawing bright line distinctions between taxing and spending is a needless and futile exercise and probably does more ham than good because it distorts the larger picture. Tax expenditures and certain benefit programs (social security and medicare) are clearly hybrids that are not easily (or properly) one or the other. If you want to do a distributional analysis, then one should consider *both* payments and benefits. Even then the exercise is difficult because for many programs the distributional effects per income cohort need to be considered over one’s lifetime and not at a particular point in time.

    Greg Mankiw had a recent post that is useful in this respect, but it considers the distribuition per income cohort only at a fixed point in time:

    http://gregmankiw.blogspot.fr/2012/07/progressivity-of-taxes-and-transfers.html

    As noted previously, Gene Steuerle, among others, has done lifetime studies of both Medicare and social security.

  20. comment number 20 by: Brooks / Gordon

    Vivian,

    Re: I think drawing bright line distinctions between taxing and spending is a needless and futile exercise and probably does more ham than good because it distorts the larger picture.

    First of all, that seems to be a straw man (unintentional, I assume). I’m not talking about engaging in some broad exercise of categorizing (let alone categorizing as all one or the other) all sorts of provisions, nor does answering the simple, narrow questions I’ve asked adversely affect any consideration of any “larger picture”. I’m not discussing any “larger picture” such as some distributional analysis, yadda yadda.

    I asked a simple, dichotomous (A or B) question about one thing (SS and Medicare taxes), and then asserted (and asked about as follow-up) what I think followed logically IF one’s answer is B.

    “A” is the view that the payer of SS and Medicare taxes is, in effect, in at least part or in some way, purchasing for himself a personal entitlement to future benefits, and “B” is the view that he is NOT.

    You gave what I consider a clear answer: your view is A. So I didn’t ask you my second (follow-up) question re: the implications of the view B.

    Steve answered B, so I did ask him the follow-up question, but I haven’t gotten an answer from him.

    AMT seemed to answer B as well, but simultaneously, for some reason, asserted that it is neither A nor B. I haven’t gotten a straight answer from him as to if/why his answer isn’t B, given that it seems to be. In any case, hopefully he can give me his answer. In fairness to him, perhaps I’m making the question a bit clearer here than in my original, since here I’m simply asking if his view is A or not A (B being simply “not A” now), rather than describing what I think B would be.

    I’m trying to get to a point regarding refundable tax credits, which most people seem to regard as obviously NOT like lower taxes, but rather as spending — “welfare” in particular — on the basis that it is the federal government sending money to someone (via the tax system) who has not paid any income taxes. Yet it seems to me that some who have this view of refundable tax credits may have a view of SS and Medicare taxes that is logically inconsistent with that view of refundable tax credits, at least with regard to many recipients, perhaps most, and perhaps all (I don’t know whether or not one’s refundable tax credits can exceed his income tax liability plus payroll taxes paid).

    Let me ask you this, to help you understand why your straw man is indeed inapplicable to my questions: Do you consider the personal exemption an individual takes for himself to be like spending at all, or would you say (as I sure would) that it is, in effect, a tax rate reduction?

    Well, if you agree that the personal exemption for one’s self is essentially a tax rate cut, not spending (and certainly not like a welfare check), presumably because it is some amount that is automatically subtracted from whatever one earns to reach the amount to which a tax rate is applied, and because it cannot (in itself) result in a negative income tax liability (the government owing the person money).

    Well, IF one has the view Steve seems to have expressed, and AMT seems to be indicating as well (Answer B to my question — “they are just taxes, no different than any other taxes and that there is no paying for future benefits because the money is spent now.”), then in my case of Joe above http://economistmom.com/2012/08/what-would-really-happen-to-tax-burdens-under-president-obama-vs-president-romney/#comment-85556 in which Joe still ends up paying federal tax on his labor income even net of the refundable tax credit to which his income level made him eligible, then the refundable tax credit is essentially similar to the personal exemption for one’s self — just something that, in effect, reduces one’s tax liability by virtue of one’s income level, which means it’s like a tax rate cut, not at all like spending.

    I am not asking you my follow-up question as it relates to your own view, because your view — your answer A to my first question — renders my follow-up question inapplicable (or at least not clearly applicable), but if you are suggesting that someone who has view B can’t give a straight answer to my follow-up question (i.e., either agreeing with what I’ve said is the implication of that view re: how to view refundable tax credits, or telling me how that implication doesn’t logically follow as I think my explanation and illustration demonstrate), or that answering that question is somehow “a needless and futile exercise”, I think you are clearly wrong.

  21. comment number 21 by: SteveinCH

    Brooks,

    To be honest, I’m weary of the debate on how to classify things. It’s not something I particularly care about and so I can do nothing but repeat my answer.

    Things that lower tax receipts are cuts in taxes, things that increase outflows are increases in spending. I’m quite aware you don’t like that answer and I’m equally aware than in the case of refundable credits, you cannot put them cleanly in one bucker or another.

    Sorry I couldn’t give you more but frankly I’m on to, in my view, more important topics that are more likely to move the needle.

    Hope all is well with you.

  22. comment number 22 by: Vivian Darkbloom

    Brooks,

    The last time I answered a multiple choice question (much less A or B) was probably 40 years ago. I’m not about to revert to that now. For the record, my answer was not “A”—it was clearly “none of the above”.

  23. comment number 23 by: Brooks / Gordon

    Steve and Vivian,

    I see you guys wish to dodge a couple of fairly simple questions that, I assume because you don’t like where the logic may lead and thus what you’d have to eventually acknowledge. That’s unfortunate.

    Steve, again, per your apparent view of SS and Medicare taxes, it seems to make zero sense for you to regard refundable tax credits as anything other than, in effect, tax rate cuts (insofar as the refundable tax credits don’t exceed individuals’ pre-credit income tax liability PLUS SS and Medicare taxes paid). But you don’t want to consider the simple logic of this and either acknowledge its validity or tell me why you think it’s invalid, I assume because you have no argument re: the latter, and you don’t want to acknowledge the validity of that point. Oh well. I guess I expected too much (although not that much) from you guys.

  24. comment number 24 by: SteveinCH

    Brooks,

    You can assume what you like. The actual answer is “I don’t care.”

  25. comment number 25 by: Brooks / Gordon

    …And Vivian, I guess when I ask whether or not you think a person paying SS and Medicare taxes is, in effect, to at least some extent or in some way, purchasing for himself a personal entitlement to future benefits, your answer is “neither”.

    In other words, I’m asking you if you think it’s A or “not A” and your answer is “neither”.

    Wonderful.

  26. comment number 26 by: Vivian Darkbloom

    Brooks,

    Did you write this:

    “I asked a simple, dichotomous (A or B) question about one thing (SS and Medicare taxes), and then asserted (and asked about as follow-up) what I think followed logically IF one’s answer is B.”

  27. comment number 27 by: Vivian Darkbloom

    Brooks,

    With respect to the prior comment, I forgot to ask:

    “Yes or no?”

  28. comment number 28 by: Brooks / Gordon

    Steve,

    I’m just going with the most plausible explanation as to why you wouldn’t take a minute and just say if you see any flaw in a very brief, simple logical flow, or alternative if you acknowledge its validity.

    All things considered, the most plausible explanation is that you don’t have any argument to the contrary, yet you don’t want to admit that (logically) you have to end up with the conclusion I stated.

    If you view SS and Medicare taxes as just like other federal taxes on labor, as you’ve said, and if someone pays no income taxes, and also, by virtue of his income level, is eligible for and receives a refund for part or all of the SS and Medicare taxes he paid, then that refund is, in effect, like a tax rate cut. It’s really not complicated, and if there is anything I’m missing there, I would think it wouldn’t be hard to tell me. But I guess you just don’t want to admit that, per your view of SS and Medicare taxes, all refundable tax credits that don’t exceed persons’ (pre-credit) income tax liability plus payroll taxes paid are, in effect, tax cuts, not spending.

    Again, not complicated. And not unimportant. As just one example, in criticizing the TPC report re: the Romney “plan”, the WSJ wrote:
    Another reality is that more than one-third of Americans pay no income tax. Many in this group contribute payroll taxes, but for most their only connection to the income tax is to receive refundable tax credits (in the form of a check) that are effectively government payments. This is the basis for the Tax Policy Center’s wild claim that the Romney plan raises taxes on those who earn less than $30,000—a group that now has a negative tax liability.

    The claim is that reducing various refundable tax credits that are cash payments from the government are a “tax increase.” By this logic, reducing unemployment benefits or food stamps would also be a tax increase.

    Whether or not the WSJ’s argument is (completely/mostly/at all) valid depends on one’s answer to my first question, and on the validity of the logical flow and conclusion in my follow-up question.

  29. comment number 29 by: Brooks / Gordon

    Vivian,
    Yes.

  30. comment number 30 by: Brooks / Gordon

    Vivian,
    Or wait, maybe I should reply that I haven’t answered a multiple choice question in X years and I don’t intend to revert back to it now. So I guess I can’t tell you whether or not I wrote that.

  31. comment number 31 by: Brooks / Gordon

    Oh, and re: the second excerpted paragraph from the WSJ’s criticism:

    The claim is that reducing various refundable tax credits that are cash payments from the government are a “tax increase.” By this logic, reducing unemployment benefits or food stamps would also be a tax increase.

    If one holds Steve’s view re: those payroll taxes (which seems to be AMT’s view too, though he won’t either confirm or explain why not), then insofar as food stamps, refundable tax credits, and any other cash benefit to which one is entitled due to income level do not, in total, exceed one’s income tax liability plus payroll taxes he has paid, all of them are, in effect, cuts in the federal tax rate on his labor income, not like spending, per the logic I’ve laid out in comments above. (Unemployment benefits would be different, because eligibility is not tied to income level).

  32. comment number 32 by: AMTbuff

    Brooks, it’s “not A”. Courts ruled long ago that past taxpayers have no enforceable right (that is to say, no actual entitlement) to any current benefit amount whatsoever. Benefits are payable at the whim of the current Congress.

    What people BELIEVE their taxes are getting them is a different question.

  33. comment number 33 by: Brooks / Gordon

    AMT,

    Thanks. So what is your answer to my follow up question?

    Given your view that someone paying SS and Medicare taxes is not in any way gaining a personal entitlement to future benefits, which means that such taxes are no different in that respect than are income taxes (all federal taxes on labor income to fund collective government spending), then wouldn’t you have to view a refundable tax credit as, in effect, a tax rate cut, IF that refundable tax credit did not exceed that individual’s total of (pre-credit) income tax liability plus SS and Medicare taxes paid (in other words, looking at all federal taxes on labor income, the individual still pays either something or zero, even net of the refundable tax credit check from the government, rather than netting out ahead)?

    See my illustration at http://economistmom.com/2012/08/what-would-really-happen-to-tax-burdens-under-president-obama-vs-president-romney/#comment-85556

  34. comment number 34 by: Brooks / Gordon

    …another, simpler, way to phrase the above scenario is that the ultimate income tax liability is zero and the amount of the refundable tax credit check received from the government did not exceed the SS and Medicare taxes he paid.

  35. comment number 35 by: AMTbuff

    Brooks, it’s a little more complicated. Under the assumption that your taxpayer does not actually receive and SS and Medicare, then these earmarked taxes are just plain taxes, offsettable by credits are you posit. For a top 10%er, I’d say this is a good assumption.

    For a bottom 10%er the assumption is poor. This taxpayer is not ENTITLED to benefits but is LIKELY to receive them. In that situation you could argue either way: that the taxes are pure taxes or that they are not. That confusion is an intended feature of these programs. You cannot resolve the confusion because it is built in.

  36. comment number 36 by: Brooks / Gordon

    AMT,

    OK, so you are saying, in effect, that if Joe is a low income earner (bottom 10%), he is, in effect, purchasing some expected value (probability X magnitude) of future benefits (since he is “likely” to receive them). Fair enough, but I’d say that your answer for such a case, is “A” for purposes of my follow-up question — meaning the follow-up question may not be (and probably isn’t) applicable (as it clearly is for an answer of “not A”). It seems you call it “not A” because you are apparently defining “entitled” differently than I am, and if so, we can put those semantics aside. The point is that, if I understand you correctly, in that low-income case, you are saying he IS purchasing, in effect, some sort of eligibility and promise of future benefits for himself, even though that promise may not ultimately be honored.

    As for the top 10%er, I suppose the only way it could work out that he ends up with zero income tax liability and a refundable tax credit check is if he has a ton of tax deductions and/or (non-refundable) tax credits (right?), and yet is for some reason eligible for a refundable tax credit check from the government despite the high gross income. Is that possible? In any case, you’re saying that, in such a case, I think your answer is “not A”, or at least the probability of getting benefits is so low that your answer is almost “not A”. In such a case, then, what is your answer to my follow-up question above? That the refundable tax credit is essentially a tax rate cut in such a case, and not like spending?

  37. comment number 37 by: AMTbuff

    Brooks, your Expected Value formulation is the correct approach. The taxes are an involuntary bet on future benefits. For a low earner, it’s a favorable bet. For a high earner, it’s an unfavorable bet which in the limit becomes a pure tax with no benefit.

  38. comment number 38 by: Brooks / Gordon

    AMT,

    ok, thanks. So the payer is still, in effect, purchasing something — some probability of getting cash later, or put differently, purchasing a promise or commitment of a cash benefit that might not be honored. So, for my purposes here (which is to ask the follow-up question), that’s an “A” answer to the first question. My follow-up question is only (clearly) applicable to an answer of “not A” to the first question, meaning the individual is not, in effect, in any way purchasing or gaining anything for himself individually by virtue of paying SS and Medicare taxes. Steve seems to be the only one with that view (he said “My own view is that they are just taxes, no different than any other taxes and that there is no paying for future benefits because the money is spent now.”), but he won’t answer the follow-up question, even though I’ve just asked him about a simple logical flow and conclusion.

    Thanks for clarifying your answer.