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Wednesday, August 13, 2008

"Obama's Tax Plan and Basic Honesty"

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

Obamatax

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.

    Posted by on Wednesday, August 13, 2008 at 01:17 PM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (29)

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