June 17, 2008

McCain Watch: Taxes

McCain's tax plan is, ahem, bad.

Here's a handy graph (stolen from The Reality-Based Community showing the benefits to each income quintile of the McCain and Obama tax plans.

The benefits from Obama's plan are in blue, the benefits from McCain's are in red, and if it costs a quintile something that appears as a downward bar. It's clear that Obama's plan benefits lower- and middle- income taxpayers while costing the top 1% and top 0.1% quite a bit (all this is measured relative to 'current policy' - i.e. extending the Bush tax cuts - rather than 'current law,' which includes a sunset for the Bush tax cuts.) McCain's plan give everyone a little bit, but gives the top 20% more (and the top 1% and top 0.1% do even better); Obama actually costs the top quintile something, but is superior for everyone else. In addition, Obama's plan increases revenue (again, relative to current policy rather than current law) by 2%, while McCain loses 2% (not to mention his non-tax policy of maintaining troops in Iraq indefinitely, which will be very expensive and contribute to large deficits). The Tax Policy Center, which is a center-left, definitely academic, generally reliable entity (partnership of Brookings and the Urban Institute, gives this analysis of economic effects:

McCain's reduced individual and corporate rates would improve economic efficiency and increase domestic investment, but the larger deficits he would incur to do so would reduce and could completely offset any positive effect. In contrast, Senator Obama's proposed new tax credits could encourage desirable behavior, particularly if the childless EITC and payroll tax rebate encourage additional labor supply among childless low-income individuals. However, he would also direct new subsidies at an already favored group - seniors - and an already favored activity - borrowing for housing-which could probably be better directed elsewhere.

I think it's worth pointing out that it is not pro-business to cut taxes and increase deficits, which McCain is essentially inevitably proposing.

Obama does not get a pass here from me. Subsidizing home equity borrowing has been way overdone, and, like the Tax Policy Center, I think there are better ways to use that money. However, his proposals are far more fiscally responsible than McCain's 'cut taxes on the rich in war-time' plan.

The bottom line is that McCain isn't even good for business interests, just for (maybe) the top 1% who benefit so dramatically from his tax plans that it offsets the damage to the overall economy. And in fact his plan is so skewed that Obama's plan is prima facie better for the bottom 80% of the income distribution. If, as economists like to believe, we are all constantly making economically rational choices, I expect to see an 80 - 20 vote split this November.


Frank said...

I am reading "The Conscience of a Liberal" right now - normally tax policy (like shopping) makes my eyes glass over but Krugman does a good job of explaining it patiently to remedial students like me. One point is how the right has long sought to cut capital gains taxes, estate taxes, etc., and make it up with income taxes (obviously regressive, and not even really "making it up"), and a lot of folks go along.

Anyway - this leads me to say that one clear failing of the left is not having intellectually challenged the idea that cutting taxes = economic growth. Take me, for example: looking at the chart, and not knowing much about tax policy, I, a regular schmo, would probably agree with McCain's plan. Benefits are shared more equally and nobody loses, and I get to keep more of my money.

My sense is most people are similar to me in that they don't know the intricacies of this sort of stuff without seeking explanation, but they are dissimilar to me in that they probably wouldn't seek explanation. Hence the fallacies of the McCain proposal continue.

And therefore a lot of people will actually, or are likely to, act irrationally and against their own economic interests in supporting such plans.

North said...

I guess it's a sign of how I don't think like other people that I look at that chart and think McCain's plan is totally bogus: the benefits are much lower than Obama's for anyone below the top quintile, and I'm certainly not in the top quintile or expect to be for quite a while (the household income cut-off for the top quintile is $88,030, according to Wikipedia, my reputable academic source). So in fact I'm thinking that I don't get to keep more of my own money, and neither do you, than under the Obama plan.

Why is that not what you see?

By the way, I fully agree that the left hasn't talked enough about the social conditions for effective growth. One interesting book about that is Globalization and its Discontents, by Joseph Stieglitz. He spends most of his time bashing the IMF, but his explanations for why exactly he hates them are interesting.

Frank said...

I meant that the impression is I get to keep more of my money, even though in reality I don't. Obama's plan gives more back, but takes at the top heavily. McCain gives piddling amounts back almost overall, but doesn't take from anyone. Look at the "all" distinction - if I don't understand tax policy and economics and I don't have the time or inclination to pay attention, I think, "Wow, why does Barack Obama want my money?"

I think Keynesian-style plans are understood in the context of the New Deal or the Great Society and thus associated with negatives (depression, poverty, recession), while neoliberal policies are associated with economic growth, financial freedom - positives, in other words. The left hasn't done a good job of correcting this.
Why else do you think we would be at war for the longest period EVER in our history and not pay for it?

Or maybe the misperception exists because we're not very class conscious as a society - certainly not in terms of the class-related anomie you see in the UK, Egypt, India, and even Russia to an odd extent.

Whatever the reason, I bet a lot of people in the 2nd through 4th quintiles would think they stand to gain more from McCain's plan than from Obama's.

North said...

What you say reminds me of the fact that a very wide range of Americans will describe themselves in ways that trend toward the middle: poor people rounding up to working or middle class, wealthy people rounding down to middle class. Similarly, many people seem to hear 'tax cut' and assume 'for me.' (The estate tax is a particularly ludicrous example of this phenomenon.)

I also think that we assume that lower over-all income taxes are per se good. All else being equal, that's nice, but when has all else been equal? Obama's plan will be a good test of the extent to which that remains true.

Maybe all of us can start pushing the idea that we would like to pay higher taxes in order to receive more/better social services, along with the idea that the US should join the rest of the world (all but 4 other countries!) in offering paid parental leave.