Over the past week, the presidential candidates have sparred over 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. policy, and how each of their plans stacks up. New tables put forth by the Tax Policy Center that have garnered some attention point to two key facts: (1) Both Obama and McCain better have some spending cuts lined up (or believe that spending will be restrained due to their tax cuts) to pay for their tax cuts or else the national debt is set to increase dramatically, and (2) Obama shifts the tax burden onto the very wealthy by giving tax cuts mostly to those who are moderately wealthy ($100-250k) along with giving greater tax relief for those below $100,000 than McCain gives to that group under a current law baseline.
But unfortunately, Obama’s method of shifting the tax burden onto the wealthy is from an economic efficiency perspective pathetic. Obama, who claims to be a person who will stand up to the powerful special interests in Washington, has decided that merely raising marginal rates is the way to raise taxes on the rich. Any public finance economist, including well-respected experts on Obama’s staff, would tell you that such marginal rate hikes are the worst way to raise revenue.
Instead of raising marginal rates, why doesn’t Obama eliminate many of the deductions and exclusions that disproportionately flow to the rich like the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. and the exclusion of employer-provided health insurance? That could raise a lot of money too, and it would still allow for the redistribution Obama seeks. But it would be doing so in a better way economically. Unfortunately, it also involves taking on powerful special interests, which is not always politically optimal.
On the other side of the aisle, some of John McCain’s tax proposals suffer from a similar problem. He has suggested doubling the personal exemption for dependents, which does nothing for economic efficiency, and is no different than more government spending (something he claims he will rein in). And like Obama, McCain also refuses to speak in favor of fundamental tax reform, which would involve taking on the powerful special interests who benefit from the current tax code. While McCain’s tax plan does have some positive economic growth features like expensing and a lowering of the corporate tax rate, he does not indicate how such tax cuts will be financed. Tax cuts are great if they are a free lunch.
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