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More Questions About the Obama Tax Plan

1 min readBy: Josh Barro

The Furman-Goolsbee WSJ op-ed which my colleague Bob discusses below provides a general overview of the Obama taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan, and as he notes, it leaves some unanswered questions about the proposals it discusses. It also entirely omits mention of two significant Obama tax proposals:

  • Exempting seniors earning less than $50,000 from income tax. As we noted earlier this week, the current proposal includes a cliff: seniors making $49,999 would pay no income tax, and those making $50,001 would potentially pay thousands of dollars in income tax. The tax code avoids such structures as they are highly distortionary—you would get seniors striving, Price-Is-Right-style, to make $49,999 without going over. However, avoiding the cliff involves phasing out the tax benefit as incomes rise, which would involve a significant tax cut for seniors making from $50,000 to, say, $75,000. It would also drive up the marginal rate for seniors with incomes in the phase-out window.

  • The windfall profits taxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance taxes and taxes levied on lottery winnings can also be considered windfall taxes on individual profits. . The article trumpets Obama's proposal to give refundable stimulus tax credits of $500 per individual or $1,000 per married couple. However, it does not discuss his intention to pay for the one-year stimulus with five years' revenue from a windfall profits tax on oil. As we discussed earlier this week, the Obama campaign has not disclosed the structure or rate for the proposed windfall profits tax, including whether it will be a production tax or an income tax. Therefore, it is not possible to fully analyze the proposal, nor to determine whether the windfall profits tax is likely to generate enough revenue to pay for the tax credits.