Observations on Tax Talk from Democratic Debate

Some observations on how taxes were discussed in tonight’s high profile Democratic debate:

Best comment of the night on tax policy: Obama refuting Hillary Clinton regarding the payroll tax cap. Clinton used rhetoric that it would hit firefighters and educators. Obama essentially asked how many firefighters and teachers make over $102,000 ($97,500 in 2007)? He also pointed out to Clinton that the Social Security reform done in the 1980s actually raised the retirement age and raised taxes, the latter which Clinton had criticized Obama for.

Worst comments: Obama and Clinton endorsing a windfall profits tax on oil companies. If the oil companies are truly “gouging” as they also suggested, then that’s illegal and the FTC should investigate. But that’s been done. And even if the oil companies were artificially restricting supply (i.e. market manipulation), the end result would be in the same direction as a carbon tax or cap-and-trade, which both Clinton and Obama support. The only difference is who receives the revenue — oil companies or government. The truckers that Clinton talks about should know that under a carbon tax or cap-and-trade system, their prices would be even higher. That’s their purpose — to discourage energy consumption through government-induced higher prices and thereby reduce greenhouse gas emissions, all to improve social welfare.

Another misinformed Clinton statement when discussing who is paying for the war in Iraq: “We’ve never had a war that we didn’t pay for.” Most wars throughout history have been deficit financed. (That’s not to say that the war is good or bad policy, but that’s just a fact.) On the other hand, it is true that it is rare for a large tax cut to be passed during a war.

On the issue of lobbyist influence on tax policy, Obama frequently claims he would limit lobbyists influence on tax policy. However, his policy prescriptions on tax policy are more of the same. Two of is biggest proposals, cutting taxes for seniors and cutting taxes for homeowners, are gifts to two of the biggest lobbies in Washington. If Obama wants to talk about truly decreasing the influence of lobbyists in tax policy, he can start by going after the top tax expenditures in the federal tax code that are backed by powerful lobbies: the exclusion of employer-provided health insurance (health care lobby), the mortgage interest deduction (real estate lobby), and the deduction for state and local taxes (public employee union lobby). Going after any of the other tax breaks that some lobbies receive would be small change compared to these big three tax expenditures.

Finally, moderator Charlie Gibson stated that capital gains tax revenues increased the year following the recent tax cuts and revenues increased after the capital gains tax was increased in 1986. But just because the two occur at the same time does not mean that one caused the other. With regards to the capital gains tax, year-over-year changes in times of tax policy changes should be viewed with a very important factor in mind: strategic short-run timing of buying and selling assets due to tax law changes and not based on economic fundamentals. Furthermore, it is true that lower capital gains taxes reduce the cost of capital and can enhance economic efficiency, thereby increasing investment. However, revenues in capital gains exclusively can also grow merely because of tax planning changes, whereby instead of being taxed as labor income, it is disguised as a capital gain.