"Obama's Tax Plan and Basic Honesty"

Greg Mankiw posts this graph under the title "The Obama Tax Plan":

Economists for Obama respond:

Obama's Tax Plan and Basic Honesty, by Jonah Gelbach: Greg Mankiw links to this attack on Obama's tax plan by Alex Brill and Alan Viard of AEI. Mankiw's post provides only a graph titled "Effective Marginal Tax Rates: Obama v. Current Law", offering the link so that readers can "Click through to the read the thousand words". From what I can tell, the Brill-Viard piece, titled "The Folly of Obama’s Tax Plan", is one of those screeds meant to confuse rather than inform.

1. According to Brill and Viard, the chart Mankiw posts shows

"the marginal rates in 2009 for a two-earner couple with two children—a college freshman and a 12-year-old receiving after-school care—under some specific assumptions"

Now, when you see someone relying on a special case like a two-earner couple with two children, one of whom is a college freshman and the other is exactly 12 and receiving after-school care, you know there's cherry-picking going on. Here, Brill and Viard are clearly trying to maximize the impact of tax-credit phaseout rules on marginal tax rates. And they don't tell us what their "some specific assumptions" are. Judge for yourself whether it's fair to take this one special case and call it "Obama's Tax Plan".

2. Brill and Viard are very helpful to readers, asking and answering the question "What accounts for the higher rates?" (they mean the ones in their cherry-picked chart, specifically). Here's part of their explanation (emphasis added):

First, Obama expands the maximum child and dependent care credit for families with one young child from $1,050 to $1,500 and phases down the credit over a longer income range, from $30,000 to $58,000. Throughout this income range, the credit is phasing out at a rate of $30 per $1,000 of income, thus raising the effective tax rate by 3 percentage points. Obama also makes certain credits refundable, which introduces a tax penalty of 10 percent or 15 percent, depending on the income bracket.

To understand how deeply dishonest the Brill-Viard piece is, you need only recognize that each of these three examples is a case in which Obama's plan increases the after-tax-and-transfer income available to the people at issue. The rest of their explanation involves Obama's proposal to increase the maximum of the current Hope Scholarship Tax Credit for college from $1,800 to $4,000 while keeping the same phaseout range. Three comments:

1. When a plan "expands" a credit's maximum, it is increasing the credit's generosity, not decreasing it.
   
2. When a plan "phases down the credit over a longer income range", it is increasing the credit's generosity, not decreasing it.
   
3. When a plan "makes certain credits refundable", it is increasing those credits' generosity, not decreasing it.

Marginal tax rates rise under Obama's plan in this cherry-picked example (assuming that Brill and Viard haven't cooked the numbers themselves) because credits have to be phased out at higher incomes, or else everyone will receive them, making them much more expensive. This is hardly a new concept, and Greg Mankiw surely understands it well. If he and the AEI distortion machine wanted to have an honest debate on Obama's tax plan, they could discuss its cost, or they could provide an honest argument over why they think the disincentive effects of higher marginal rates outweigh the benefits of increasing disposable income for lower and middle income folks.

Instead, their argument boils down to making a big deal about the fact that disincentive effects....exist! That sort of observation won't win you the Nobel prize.

The key point that Brill and Viard neglect to note or discuss is that even in their cherry picked example, higher marginal tax rates bring along offsetting benefits to families with lower and middle incomes. If the families don't change their behavior, their disposable income will be higher, not lower, under Obama's plan. If they do change their behavior, then by revealed preference, these families will still be better off, since every supposedly nefarious change in the tax code that Brill and Viard mention is an expansion in generosity. Revealed preference says that you can't be made worse off by having more options. This is a question of basic microeconomics.

It's also a question of basic honesty.

An honest article meant to inform would show both the marginal tax rates graph and a graph of after-tax-and-transfer income against pre-tax-and-transfer income. I assure you that there is a very good reason that Brill and Viard don't include that second graph. Of course, a really honest article wouldn't cherry pick the way Brill and Viard did, either.

Comments

[don]

Oh oh. I thought Greg would be above this sort of thing. He should be more careful about what he includes in his blog. I would hate to see his credibility shrink to the level that Bernanke's did when he cited the trade piece by Hufbauer et al.
Anyway, equity of taxes depends on the average tax rates, not the marginal rates, and Greg surely knows this.

[Devon]

Posts like the one linked above are the reasons why I wish Mankiw hadn't turned off comments and, in the absence of a way to debate the point in an indirect manner with him, why I stopped reading his blog. I just realized, after seeing that picture, that he has had a wealth of entries that were transparent in their bias and weren't at all concerned with giving his students a fair idea (or interpretation) of what was going on in the stories he was reporting.

[donna]

HOe about a post on Mankiw and basic honesty?

I quit reading him ages ago.

[dissent]

In turning comments off, Mankiw shows his true colors as a conservative. That is a characteristic of a large proportion of conservative blogs. Methinks it's also a sign of wimping out in the face of free and full debate.

[Richard H. Serlin]

It's amazing how some Libertarian economists, and/or ones who want to curry favors from the Republicans, will professionally embarrass themselves.

[me]

What donna said. Mankiw is a shill who I quit reading long ago. If his lips are moving he is lying.

[macburger]

..one of those screeds meant to confuse rather than inform...

...That sort of observation won't win you the Nobel prize...

..It's also a question of basic honesty...

..a really honest article wouldn't cherry pick..

Talk about taking a knife flowers to a gunfight.

So which academic economist is going to call Mankiw a liar, and a hack?

No pablum, no sugar coating, no professional mumbo-jumbo, but plain talk - "You are a crook and a liar"

Or is he still one of "yours"?

[B]

I'd love to see the infographic wizards at the NYT or elsewhere come up with a real-time graph generator that allowed one to play with the parameters, and generate a graph like this across a spectrum of incomes (# kids, which tax breaks are valid/closed, effects of AMT, etc). A bit complicated but a rough sketch would be nice.

If Obama or McCain were confident in their tax plan's attractiveness, the campaign itself would supply an online tool like this.

Instead, the only online "tools" we have are ones like the completely in-the-tank Mankiew. It's really unfortunate to watch what that man has done to his credibility as a serious person.

[Jon]

Maybe I'm being silly here, but I thought that the AEI article was perfectly clear, and the EFO response was a bit confused.

Charting marginal tax rates across tax brackets is pretty misleading if you don't stress the marginal part. However, the AEI article was clear that it was talking about marginal rates, and it did a good job of laying out exactly what was driving them. The example might have been cherry-picked, but it was cherry-picked to illustrate the distortions inherent in any tax code loaded with means-tested credits. After all, the cherry-picking also exhibited a family best-placed to benefit from the tax-cuts in the first place.

The EFO response avoided the issue of marginal rates, preferring to present the distortionary effects of variant marginal tax rates as an inherent feature in any progressive system. However, this is a false dilemma, as it's entirely possible to have an arbitrarily progressive tax system with constant or near-constant marginal tax rates.

That said, the increased progressivism of the Obama plan likely outweighs its distortions in most moral calculations, despite the valid issue of marginal tax rates raised by the AEI.

[Joe]

The current tax law has a marginal rate of 46.3% on seniors. This occurs as additional income at a 25% rate on a dollar causes taxation of 85 cents of social security. That adds up to 46.3 % taxes on a dollar. I was hoping that Obama would fix this problem. Maybe he did, maybe he didn't. Not much confidence in Gregg's chart because the 46.3% marginal rate doesn't show.

When Alan Greenspan designed the SS income tax in 1983, the $15,000/$34,000 income limits were reasonable. After 25 years of inflation the SS tax is a mini-AMT that should be fixed.

[X Man]

As far as I'm concerned, Obama can raise taxes as high as he wants as long he gets us out of Iraq. That would solve a big part of the budget crisis in one fell swoop.

[Richard H. Serlin]

You immediately know this graph is at least very unrealistic and deceptive if you look at it closely. At $45,000 of income for both the current tax system and under Obama's programs they put the marginal tax rate at zero! How many families with income around $45,000 do you think have marginal tax rates of zero?!

[Richard H. Serlin]

Note also that they have the marginal tax rate for families under the current system and Obama's making $25,000 at 20%, but it DROPS to zero for families making $45,000! This is very deceptive to say the least. It makes you pull your hair out how some economists will deceive for Libertarian reasons or to curry favor with the Republicans. Thank goodness few university trained economists are Libertarians or trying to curry favor from the Republican machine.

[Punditus Maximus]

Ok, I give up. I won't use Mankiw's texts any more. Just egregious.

[Real Person from the Real World]

Smoke and mirrors. The math and chart challenged crowd will swallow anything provide by someone with a big name and credentials.

[Barry]

Devon says...
"Posts like the one linked above are the reasons why I wish Mankiw hadn't turned off comments and, in the absence of a way to debate the point in an indirect manner with him, why I stopped reading his blog. "

Posts like that are the reason *why* he turned comments off - a Harvard economics professor might be able to mop the floor with random internet commenters, but a Harvard econowh*re can't. The real question is, are there any honest economics professors at Harvard?

[James]

Most US Companies Pay No Income Tax

http://tiny.cc/0aXZu

[Alan Viard]

As one of the authors of the article being discussed, I want to respond to the statements made here. Unfortunately, Mark Thoma did not post Alex Brill's and my article (only our chart and a link to the article) while posting a lengthy reply by Economists For Obama (EFO). I urge readers to look at our original article, which will make clear that the accusations of dishonesty are completely unfounded.

EFO's suggestion that we "cooked" the numbers is a vile libel for he which they present no evidence. The accusation is utterly false.

EFO says that it is "deeply dishonest" and a violation of "basic honesty" to say that Obama's plan would raise marginal tax rates as well as reducing tax payments. In fact, since Obama's plan would do both of those things, basic honesty requires that both effects be mentioned, as we do in our article. We repeatedly make clear that Obama would cut taxes for the poor and the middle class: the topic sentence at the beginning of the second paragraph states that "Obama is offering a new series of tax breaks," the next paragraph says that he would make some tax credits refundable (and illustrates refundability with an example which makes clear that it involves a reduction in tax payments), the fifth paragraph mentions that he would expand a tax credit and repeats that he would make credits refundable, and the seventh paragraph mentions that he would increase another credit's maximum value. EFO actually quotes some of these statements. It is unclear what aspect of Obama's tax plan we are supposed to have concealed, but it certainly can't be the fact that he's cutting taxes.

Yesterday, one blog (that apparently looked at the chart without the article) did trumpet our work as showing that Obama would impose "higher taxes" on nearly everyone; I immediately posted a comment explaining that Obama would lower tax payments.

The point our article makes is that Obama's tax cuts are designed in a way that increases disincentives by raising marginal rates and increases complexity. Since EFO admits that the disincentive effects exist (and explains why they arise), it is unclear why they consider this claim dishonest.

Of course, people are perfectly free to draw different policy conclusions from this fact (as Jon does in his excellent post here); that's the kind of debate Alex and I hoped to encourage. So far, the disincentive effects have scarcely been mentioned, so pointing them out is a necessary step towards informed discussion.

I don't have space to defend the example, but it is not "cherry picked." Some other examples would show bigger disincentive effects; others would show smaller. Unfortunately, there is no typical example to fall back on, because different kinds of households are affected in so many different ways. But, since it's undisputed that Obama makes credits refundable and increases the use of phase-outs, any example will show these kinds of disincentive effects. Can any of our critics construct a remotely realistic example that doesn't? Again, EFO admits that the disincentive effects exist. (As a side note, the child in our example need not, of course, be exactly 12, but can be any age 12 or younger).

Contrary to Richard Serlin's statement, the chart does not show a zero marginal rate at $45,000 for Obama's plan; the rate is 39.06 percent (the taxpayer is in the 15 percent bracket, the earned income tax credit is phasing out at 21.06 percent, and the child-care credit is phasing out at 3 percnet). It does show a zero rate under current law, which is correct, as the family's tax liability is holding steady at zero at this level. (The family claims an $11,400 standard deduction and $14,600 personal exemptions, leaving taxable income of $19,000, on which the before-credit tax is $2,015, which is wiped out by a $600 child-care credit, $1,000 child credit, and $1,800 HOPE credit).

The marginal tax rate at $25,000 is 21.06 percent under both current law and the Obama plan because the EITC is phasing out at 21.06 percent at that income level. It is hard to see what aspect of these results are implausible.

Alex Brill and I hoped that our article would call attention to the disincentives and complexity of Obama's tax cuts, an important topic neglected in the discussion to date. It is unfortunate that this discussion has been sidetracked by misinterpretations of the (clearly stated) points in our article.

[Ex-Worker]

The point of a graph is to make quantitative arguments intuitive.

But why does current policy drop to 0 at $45k only? That makes no sense at all.

I don't think you can argue that Obama's articulated plan increases taxes on the middle class. Of course, he's as bad as McCain with his something for nothing pandering.

[SGC]

AV above: "Obama's tax cuts are designed in a way that increases disincentives by raising marginal rates."

From the original article: "As the chart shows, Obama’s give-and-take tax policy results in marginal tax rates of 34 percent to 39 percent in the $31,000 to $45,000 income range for this family. That’s an increase of 13 percentage points or more from the current rates. ... The larger phase-out would boost the penalty on work from 9 percentage points to 20 percentage points."

I'm not sure this argument works so well in this case. The authors' analysis of marginal tax rates appears to rely on calculus: how income moves incrementally as marginal tax rates change. But taking on a new job is a big discrete change that cannot be analyzed using calculus.

Go back and look at the chart. It looks to me like a couple earning 35-45,000 per year has a strong incentive to take another job precisely because the income from the second/third job will be taxed at a lower rate.

I don't think Alan Viard can talk about problems with incentives under Obama's plan until he analyzes the dynamic effects of a varied marginal tax rate across incomes and allows for the large DISCRETE changes in income that are generated by taking on another job. I.e. there is no reason to believe that an economic analysis that relies on calculus will give acceptable results in this case.

Two questions that need to be answered before any conclusions about incentives can be drawn from this chart are: What is the income distribution of couples with a 12 year old and a college student and what is the distribution of the job opportunities available to such couples at each income level?

[Jon]

SGC:

To find the tax rate paid on all extra dollars you're earning after a raise, you take the integral of the marginal tax curve - intuitively, just look at the area under the line.

Of course, you're right that the objection against the new plan's 'bumpiness' is most relevant to small changes in income. However, that happens as well - imagine a guy deciding whether to put in extra effort at his job to earn a $5K raise. There's a big difference between keeping $2K of that raise verses keeping $4K.

[SGC]

Jon: "To find the tax rate paid on all extra dollars you're earning after a raise, you take the integral of the marginal tax curve - intuitively, just look at the area under the line."

Precisely, my point. If Obama's plan had steadily rising marginal tax rates across all incomes, Viard's analysis would be robust. However, because marginal tax rates go up and down, we need more data to analyze the incentive/disincentive effects of the plan.

[SGC]

Jon: "a $5K raise"

For someone earning $50K or less, I'd put that in the category of a big discrete change, not something that can be analyzed using calculus. If you meant to talk about a raise of $500 or less, I'd be willing to accept the use of calculus.

[Lafayette]

I never did and perhaps never will understand why a nation expects parents to pay for tertiary education of their children.

Primary and secondary school education are assumed by the state for very good reasons, well understood. Why not tertiary education for the very same arguments? Why this added burden upon parents in a world where it is already difficult enough to make ends meet? The cost of a tertiary education represents, as well, a significant cost barrier for a great many young adults.

Is it not discriminating to assume against the less well off to assume that their children will be eligible for a scholarship and therefore will go to university? And, it is even more discriminating to assume that those not fit for university will obtain nonetheless some sort of professional qualification on their own.

It won't, because these are precisely the sorts of people that must be both prompted and assisted in continuing their education/training.

The fact of the matter is that a high school education is proving more and more barely adequate to cope in life, given increased labor force competition. A tertiary education, either university or leading to a professional qualification, is all the more a prerequisite in order to obtain and maintain a decent lifestyle.

Therefore, it should be free, gratis and for nothing -- for those who want to make the effort. The money spent subsidizing enhanced workforce skills will be returned in lower delinquency and crime rates and/or reduced unemployment assistance.

That's goodness.

[jonah gelbach]

viard posted a version of his response here in the comments to my original post. for anyone interested in my rejoinder (i stand by what i wrote), here's the link.

[Richard H. Serlin]

In response to Alan Viard's comment, first, my mistake, I did look at the graph a little too quickly, the marginal rate under Obama's program wasn't zero at $45,000.

I consider participating in the comments on a blog like engaging in a dinner conversation on important events of the day, except that the great thing is that you can do it with people all over the world 24/7. In a dinner conversation you don't carefully double check and vet everything you say beforehand, like in an article for an important journal. If you set this standard, and you're like most academics, you would almost never have time for casual discussions with colleagues and others, and this would really hurt the process of discovery and learning. These kinds of conversations can be very useful, and good ideas can get out that would not get out for years – and possibly never – if they could never be told to anyone until they were double checked, polished, and otherwise vetted to the standards of an article submitted to an important journal. Nonetheless, I apologize for looking at your graph a little too fast and misreading the marginal rate you have under Obama's program for an income of $45,000.

Now, I'd like to make a different point, that one can easily mislead and deceive even when saying something that's literally true. You're specific example may be literally true, but it may be very unrepresentative. You note that there are examples that show higher differences in marginal rates and examples that show lower, but this statement can be misleading too even if literally true. What are the at least approximate proportions? If they are 99.99% of the examples fall into the much less of a difference category and .01% fall into the more, then you have said something that is literally not false, but nonetheless very deceptive.

Suppose the Republicans design a tax cut where no one gets a penny if their income is under 1 million dollars per year, but for those with an income over 1 million, the tax cut is so large that it puts the average at $2,000 per person. If the Republicans proclaim everywhere that the average tax cut is $2,000 they haven't said anything that's literally false, but they have purposely been extremely deceptive. It makes it look like the typical person will get $2,000 when the typical person will, in fact, get zero, and Republicans purposely engage in deceptions of this kind all the time.

I would note here that the total tax bill can drop dramatically even when the marginal rate goes up.

Finally, with regard to incentives, I would note the long ago proven and accepted in serious academic economics, income and substitution effects, and the backward bending labor supply curve. Empirically, the curve usually bends back at roughly the upper middle class level, meaning that we would expect these people to work at least somewhat more after a tax increase, essentially because of the incentive to work more hours to maintain their current level of consumption. To see a more complete explanation of this I recommend any university Microeconomics text and Cornell economist Robert Frank's New York Times article, "In the Real World of Work and Wages, Trickle-Down Theories Don’t Hold Up", available at: http://www.nytimes.com/2007/04/12/business/12scene.html?ref=business .

[Maynard]

Brill and Viard open their paper with the statement "Senator Obama’s proposed ‘tax cuts for the middle class’ are actually marginal rate hikes in disguise." It's easy for someone who reads the paper quickly to think that B&V are saying that taxes are going to rise for the middle class.

Here's a guess as to why B&V are so surprised that people took their article the wrong way. Maybe if you spend too much time at an institution like AEI you forget that people out there in the world think of tax cuts as a way to give people more money, make them happier. You start to view tax cuts purely through the prism of supply side economics, as a way to promote growth. So when you write a paper saying that the tax cuts will reduce growth by raising marginal rates, it never occurs to you to mention that at the same time they make the recipients better off. It never occurs to you that the people reading your article who aren't supply-siders are looking at the issue through a completely different prism, and that when they read that the tax cuts are actually "marginal rate hikes in disguise" they think you mean that recipients of the 'tax cuts' will actually be paying more.

[Richard H. Serlin]

With regard to Maynard's comment, based on the disgraceful, and unprecedented in modern times, record of the Republican machine again and again intentionally misleading, I think it's very likely that it was no mistake; the authors knew full well that what they wrote would be extremely misleading to the general public.

[Patricia Shannon]

I know from talking to people that many. maybe most, people, don't understand how the tax system works and what marginal tax rates are. They're going to see a graph like this and think it is showing total tax rates. Which may be what the authors want.

There are people who really believe that if you get a raise of one dollar that puts you into the next tax bracket, it means you will have a higher tax on your total income, and thus end up with less money after taxes.