In the Tuesday Wall Street Journal, Professor Alan Blinder wrote of his puzzlement at the very slow growth of productivity in the last three years. There is really no mystery. The rate of growth of investment in...
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- Questions About the Obama Tax Plan
Questions About the Obama Tax Plan
Today's Wall Street Journal op-ed by Senator Obama's chief economic advisors, Jason Furman and Austan Goolsbee, outlines much of the senator's tax platform and makes a number of claims that are not completely consistent with the evidence or the facts. Just a few points:
- Top tax rate: Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises by 12 to 14 percentage points, from 37.9 percent to roughly 48 to 50 percent. "High" is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986.
Note: These calculations work as follows: (1) 37.9 percent equals the current 35 percent top income tax rate plus the current 2.9 percent Medicare tax rate; and (2) 48 to 50 percent equals Obama's 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemption and certain itemized deductions.
- The 1993 record: It is always hard to say what would have happened if Bill Clinton had not raised tax rates. But how damaging were the higher tax rates in economic terms? Economic research suggests that the two higher tax rates he passed on wages damaged the economy and shrank the size of the federal tax base, leaving less income exposed to those new rates. As a consequence, the increase in tax rates raised 40 percent less in revenue than some might have thought.
- Government debt: Both candidates would increase the government debt. According to the Tax Policy Center, Senator Obama's plan would add $3.4 trillion to the government debt over the next ten years. Senator McCain would add roughly $5 trillion.
- An important clarification: Senator McCain has proposed a very significant change in the tax treatment of health care. He would replace the existing exclusion for employer-based health insurance premiums with a refundable tax credit for health care. This refundable credit would be $5,000 for family coverage and $2,500 for individual coverage. Importantly, and a point not recognized in the op-ed, McCain's health plan would be revenue neutral. It's not a $3.6 trillion tax hike because the existing $3.6 trillion tax subsidy (over ten years) for health care in the tax code today is rechanneled to low- and moderate-income taxpayers through the credit.
People tend to have very different views on proposals that redistribute income from higher income taxpayers to low and moderate income taxpayers, but it would seem that this important health care proposal from McCain actually fits in well with Senator Obama's tax plan, which is so focused on redistributing the tax burden.
- Nothing new on the estate tax: The Obama plan would still increase the top estate tax rate to 45 percent and set the exemption at $3.5 million per person ($7 million for couples). This third layer of tax on capital income detracts from economic growth. It adds an equivalent of another 5 to 10 percent tax on capital, in addition to the corporate tax and the investor level taxes on capital and dividends.
- One interesting detail on dividends and capital gains: Senator Obama would set the top tax rates on dividends and capital gains at the same rate, but proposes to increase the top rate to 20 percent. Note that the 20 percent rate is below the 25 percent and 28 percent that have previously been reported.
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