Governor Palin Talks Tax Incidence Too

September 4, 2008

From last night's speech in St. Paul, here the remarks of Gov. Sarah Palin discussing tax policy (referring to Obama's policies) courtesy ABC News:

'Congress spends too much … he promises more.

Taxes are too high … he wants to raise them. His tax increases are the fine print in his economic plan, and let me be specific.

The Democratic nominee for president supports plans to raise income taxes … raise payroll taxes … raise investment income taxes … raise the death tax … raise business taxes … and increase the tax burden on the American people by hundreds of billions of dollars. My sister Heather and her husband have just built a service station that's now opened for business – like millions of others who run small businesses.

How are they going to be any better off if taxes go up? Or maybe you're trying to keep your job at a plant in Michigan or Ohio … or create jobs with clean coal from Pennsylvania or West Virginia … or keep a small farm in the family right here in Minnesota.

How are you going to be better off if our opponent adds a massive tax burden to the American economy?

Is she right? Not totally. Assuming a current policy baseline, Obama does raise taxes on those making more than $250,000 directly, which would indirectly affect those "trying to keep their jobs at a plant". This is due to the fact that the economic incidence of a tax rarely falls 100 percent on the person who remitted the check. (Distributional tables typically assume this for convenience.) Given that a disproportionate amount of income earned by those above $250,000 is business income, higher taxes could result in higher prices (short-run) and lower wages (longer run), affecting those below $250,000 (like those that Palin is talking about).

However, as I've said before, those higher prices and lower wages for those households below $250,000 (especially those under $100,000) would likely pale in comparison to the amount those households will be receiving directly from Obama's "tax cuts," which are really just government handouts administered by the IRS (i.e. tax expenditures) if one excludes the AMT patch. In other words, any dynamic distributional analysis of Obama's plan would still leave most of those earning below $250,000 with more after-tax income (ceteris paribus) than under the current policy baseline.

Of course, this ignores the impact Obama's plan would have on the deficit, as well as how Obama's plan compares to McCain's. But the tax plans of the two candidates relative to current policy can basically be summarized as follows. Obama: large deficits; focus tax cuts on lump-sum transfers to anyone he doesn't consider rich. McCain: even larger deficits; focus tax cuts on overall economic growth. (Note: The adverse effect on national saving from McCain's larger deficits would take back some of the positive impact on economic growth that is tax cuts are designed to promote.)


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