Obama And McCain On Taxes

by hilzoy

The Tax Policy Center just put out a very good report (pdf) comparing McCain's and Obama's tax plans. The basics: how much, or (in Obama's case) whether, each candidate's tax plans would add to the deficit depends on what you take your baseline to be, and in particular, on whether you assume (a) that Bush's tax cuts expire on schedule are made permanent (oops!), and (b) that the Alternative Minimum Tax gets a permanent fix. (Both are very, very expensive.) Personally, I prefer assuming (b) but not (a): there's bipartisan consensus behind fixing the AMT, and it's overwhelmingly likely that that will happen eventually; but there is no such consensus behind making Bush's tax cuts permanent.

However, the Center doesn't score the candidates' plans as I would like, proving once again that my whims do not govern the universe. If you assume neither (a) nor (b), then the candidates' "specific non-health tax proposals would reduce tax revenues by $3.7 trillion (McCain) and $2.7 trillion (Obama) over the next 10 years. (...) Furthermore, as in the case of President Bush's tax cuts, the true cost of McCain's policies may be masked by phase-ins and sunsets (scheduled expiration dates) that reduce the estimated revenue costs. If his policies were fully phased in and permanent, the ten-year cost would rise to $4.1 trillion, or about 11 percent of total revenues."

If, on the other hand, you assume both (a) and (b), then "Senator Obama's proposals would raise $700 billion, an increase of 2 percent, and Senator McCain's proposals lose $600 billion, a decrease of roughly 2 percent."

However you score it, McCain's is more expensive by at least a trillion dollars over ten years.

Who gets what from these changes to the tax code? Here's a graphic, which Kevin Drum got from the report, and I stole from him:

The cutoffs for these quintiles (in 2008 dollars) are as follows: "20% $19,740, 40% $38,980, 60% $69,490, 80% $117,535, 90% $169,480, 95% $237,040, 99% $619,561, 99.9% $2,832,449." (p. 24.) It's worth noting that if you check the table on p. 24, which has more detail than this graph, you can see that people below the top five percent (which starts at $237,040) do not lose after-tax income under Obama's plan, and people making $237,040-$619,561 lose all of $12 a year, on average. It's only in the top one percent that people take a sizable hit. But since so much of the Bush tax cuts went to them, that seems fair to me.

***

One more interesting note: the Wonk Room points out that this report attributes to McCain some positions that are at odds with his web site and what he's said in the past -- as recently as the day before yesterday, in fact. Most notably, McCain's website says that "John McCain will permanently repeal the Alternative Minimum Tax (AMT) – a tax that will be paid nearly exclusively by 25 million middle class families." The TPC report, by contrast, says: "Senator McCain proposes to extend permanently the AMT "patch" that has prevented most individuals and families with incomes below $200,000 from being affected by the tax."

This is a big difference. The AMT is a tax that was designed to ensure that the rich do not avoid paying taxes. It excludes a lot of loopholes and the like. The problem with it is that since the level at which it kicks in is not indexed for inflation, more and more people are covered by it every year -- or they would be if Congress didn't pass "patches", which basically exempt people below a certain level from paying it. (Why not do this permanently? Because it would blow a huge hole in the budget that no one can figure out how to deal with, and passing a one-year patch minimizes what Congress has to find in order to comply with PAYGO rules.)

In any case: "patching" the AMT means: moving the level at which it kicks in back to the level it was meant to be at, so that only the wealthy pay it. (Preferably, the patch would not just be made permanent, but also indexed for inflation, so that this problem doesn't come along again in a few years.) Repealing the AMT, by contrast, means, well, repealing it, so that no one pays it at all. The difference between the two concerns whether the wealthy pay the AMT or not. And repealing the AMT is a lot more expensive than extending the patch.

The Tax Policy Center consulted with both campaigns before writing this report. If what they say is accurate, then McCain has changed an important part of his tax policy, but neither his website nor (apparently) McCain himself as of two days ago have caught up with this fact. On the other hand, if the TPC is wrong, and McCain does plan to repeal the AMT, then the TPC's estimates of the cost of his tax plans need to be revised as well.

According to the CBPP, the difference between amending the AMT to exclude people with incomes under $200,000 a year and repealing it altogether is over $50 billion dollars a year. Since the CTP estimates the cost of the candidates' tax plans over a ten year period, if they're wrong about what McCain thinks, we'll just have to tack another half a trillion dollars onto their estimate of his plan's cost.

Confusion and reckless profligacy, or no confusion and even more reckless profligacy? We report; you decide.

Comments

[JanieM]

This made me smile: However, the Center doesn't score the candidates' plans as I would like, proving once again that my whims do not govern the universe.

I say, too bad about that.

More seriously, concerning this:

(a) that Bush's tax cuts expire on schedule, and (b) that the Alternative Minimum Tax gets a permanent fix. (Both are very, very expensive.)

Am I confused about the direction of cause and effect, or are these things opposite as stated? Won't (a) (letting the tax cuts expire) increase tax revenue, while (b) reduces it? Thus (b) would be expensive for the government but (a) as stated would not.

I.e. it's the tax cuts that were expensive, not their demise, whereas with the AMT it's the demise that will be expensive.

I don't mean to quibble; I know almost nothing about economics and revenue flow so I may simply be missing something.

[tgirsch]

hilzoy:

To pick a nit, I think you're assuming a and b. Or you're thinking that you wrote "a" as "Bush's tax cuts are not allowed to expire..."

Otherwise, well said.

[hilzoy]

JanieM and tgirsch: oops! I hate it when that happens. (Write it one way; decide it sounds better the other way; forget to change things completely, end up with nonsense...)

Thanks for pointing it out. It's better now. (I hope...)

[Sebastian]

I know I'm a broken record, but we wouldn't need the AMT if we had a tax system that was straightforward and didn't have stupid loophole-giveaways.

[Jim]

It seems everyone is splitting this up by partisan lines. I wish we could all get together and agree on one thing and demand change - "slightly more expensive" or "slightly less expensive", in my book, both completely unacceptible.

[tgirsch]

Sebastian:
I know I'm a broken record, but we wouldn't need the AMT if we had a tax system that was straightforward and didn't have stupid loophole-giveaways.

I'm with you in principle. Unfortunately, most such proposals I've seen invariably shift the tax burden substantially toward the lower end of the spectrum, and often end up being regressive in practice. That's not cool, either. At least, I don't think so.

[Sebastian]

As I outlined in a recent thread, I'm for the large majority of people having the same tax rate with the bottom rung being untaxed. To avoid disincentive effects, there should be a nice smooth curve up to the basic tax rate (whatever it is), but by the time you get to about 70 or 80% of median income you and everyone above you would be paying the basic tax rate.

But in any case, simplification and progressive/regressive questions are independent.

Progressivity is about what the rate is for a given income level.

Simplification is, in our system, about getting rid of a maze of exceptions, hidden subsidies, and probably just plain accidents. The complexity of the tax code, and the many ways that complexity can be exploited by rich people or people with hyper-specialized knowledge, is a symptom of my general critique of how we allow government to function.

[Daniel Merritt]

Good post & analysis. The Republicans have gotten away with claiming "fiscal conservatism" way too long, and just when it seems people are finally realizing how irresponsible they are, McCain's "maverick" image lets him get a fresh start. It's important to show how his fiscal plan is as utterly reckless as Bush & the 107 - 109th GOP Congress.

Of course, when analyzing president's election time proposals, it's worth remembering the old political warrior's dictum:

No plan survives contact with the Congress.

Jim: All the American people are clamoring for right now is a free lunch. The public as a whole is spoiled by decades of political promises that they can slash taxes and still raise spending. The Republicans with their Laffer Curve are the most egregious, but with Americans' allergy to the idea of "taxes" pretty much everyone has been promising it.

Both candidates in this campaign have one little piggy bank they point to as the source for all their money. A piggy bank which conveniently won't involve making the vast majority of voters pay for any of it.

For McCain it's "pork barrel spending". Sure, a lot of pork is bad; farm/ethanol subsidies are just mind bogglingly horrendous. But even with an incredibly broad view of pork - including, for instance, the military aid given to Israel and Egypt under the Camp David accords - it only adds up to something like $60 billion. There's not nearly enough there to pay for McCain's tax cuts.

For Obama it's the "richest 1%". This is better, and by hiking taxes there you can make more money than you can just by slashing pork. But even there you can only milk so much; there are only so many people with huge incomes to tax. It could definitely pay for several things, but Obama points to it as the source of money for all his programs and proposals.

I'm actually a little uncomfortable with using tax increases on only the top 1% as the sole source of revenue for programs. I approve of a progressive tax system, and think that top 1% should pay more than they currently do under the Bush tax system. But it really makes me worry when all of the new tax burden is put in one place, on a numerically small group of people, to pay for all sorts of programs promised to different people. It really leads to the wrong sort of "free lunch" attitude. If it wasn't political suicide, I'd much prefer to impose a small tax increase on the "middle class" along with the much larger tax increase on the wealthy. Make sure people always pay at least a TINY bit extra for their new programs.

[Sebastian]

"Unfortunately, most such proposals I've seen invariably shift the tax burden substantially toward the lower end of the spectrum, and often end up being regressive in practice."

Incidentally, why is that? Why don't liberals seem to want to propose tax simplification that is also progressive? I don't really get it. Do liberals or more specifically Democrats think that the hyper complex tax situation is a good thing somehow?

[tgirsch]

Sebastian:

I'm not inherently opposed to a simpler-yet-progressive tax code. I suspect why you don't see a wider call for it among Democrats is because it does away with the social engineering aspects of the tax code (about which I'm personally more or less ambivalent), such as offering tax incentives for certain behaviors they want to encourage (education, home ownership, etc.). Of course, Republicans are equally guilty of this, they just favor different kinds of tax breaks targeted at different demographics.

But frankly, I don't think a simplified tax code is really all that popular in practice with liberals or conservatives. The general attitude seems to be, "Sure, simplify the tax code, just don't take away my deductions." It's like "small government": it's one of those things that people say they're in favor of in the abstract, but when you start getting down to particulars, they're really not all that gung-ho on it.

[hilzoy]

I will be fine with abjuring tax increases on people making over, say, $250k a year when I feel that the tax system is closer to fairness. At present, when so many tax cuts have been directed at them for so long, I feel precisely no urgency about that.

[Turbulence]

I think we don't see liberal support for simplifying the tax code because eliminating the home mortgage deduction is political suicide. For good or ill, many people identify owning a home with success and many of those same people are convinced that the deduction is vital for their continued financial sustainability.

[Sebastian]

"But frankly, I don't think a simplified tax code is really all that popular in practice with liberals or conservatives. The general attitude seems to be, "Sure, simplify the tax code, just don't take away my deductions." It's like "small government": it's one of those things that people say they're in favor of in the abstract, but when you start getting down to particulars, they're really not all that gung-ho on it."

Sure. It is like a lot of things in politics: dealing with the evils of gerrymandering, fiscal responsibility, cutting waste, dealing with the farm subsidy (oh that is cutting waste). They all are more effective tools used to oppose someone else's stuff rather than deal with your own.

[Ugh]

Wow, 2 tax posts in 3 days, my cup runneth over.

[Turbulence]

They all are more effective tools used to oppose someone else's stuff rather than deal with your own.

I really don't think that's the reason that the plethora of deductions survive. They survive because constituents want them and get very angry when politicians talk about taking them away. Politicians reflect their constituents views and constituents want their home mortgage deduction in addition to a wealth of others.

Now, if we ever got magical politicians that had no interest in ever being reelected, I suppose they might work to eliminate these deductions.

[Bernard Yomtov]

Unfortunately, simplifying the tax code woud not be simple even if it entailed no political problems.

The first, and biggest, set of problems come from defining income. This seems easy enough for those many people whose income is salaries/wages and maybe some straightforward dividends or interest from investments. Even there it's not clearcut. Would your simple system tax the value of employer-provided insurance?

Once you introduce business-related income you get into worse problems. This is not restricted to complex business dealings. Professionals like photographers, dentists, anyone doing free-lance consulting work, etc., face them. What counts as an expense, or as revenue for that matter? What about that car or computer? How to depreciate the new dentists' chair? etc.

Then there are the transitional fairness issues. These are obvious with the mortgage deduction. What about the investor holding a twenty-year municipal bond who suddenly loses the tax exemption? That doesn't seem right. (The bond pays less than comparable taxtable bonds because of the tax exemption).

The tax code could be somewhat simplified of course, but the notion that we can simply do away with all the complexities with a stroke of the pen had we the will is fantasy.

[Daniel Merritt]

Hilzoy: I'm not saying we shouldn't raise taxes on people making over $250,000. I'm not even saying we shouldn't substantially raise taxes on people making over $250,000.

My point is that the Democrats use "tax the top 1%" as an infinite rhetorical piggy bank in the past few years. For every single plan they propose, for every piece of new spending they roll out, for every new middle class tax cut they promise, the answer to "how will you pay for it?" is the same: "increase taxes on the top 1%".

I just hate the "free lunch" attitude behind this for promises to the vast majority of Americans. The Republicans are even worse, since they promise that they can cut everyone's taxes and still increase revenue and thus pay for new campaign promises.

By all means raise taxes on the wealthy by 5% or more, I just think other tax brackets should increase by like .5% or 1% at the same time, or that they should sacrifice some portion of their tax cut. Because everyone thinks they can get what they want for free - and never have to pay more taxes - no one can realistically propose a carbon tax, despite it being by far the most effective way to stop global warming. And campaigns can just list hundreds of promises and programs without people stopping to think, "is that worth it?"

[hilzoy]

Daniel: I'm fine with that, but not this time.

Part of the reason for that is that I think that Republicans have done such a delightful, destructive job of making the very idea of any tax hikes, ever, completely toxic. That being the case, my political take on it is that we need to have a tax hike in order not to let the deficit get completely out of control; since the overwhelming majority of the Bush tax cuts went to the rich, I have no fairness issues this time round; and I think it matters that people see that you can have a tax hike without the world coming to an end.

Or, shorter me: first things first.

[Tom]

I just hate the "free lunch" attitude behind this

Well, some of us like free lunches!

Seriously, given how many big fat tax cuts the richest 1% of Americans have gotten in recent years, I have good reason to be absolutely positive that they can easily afford more taxes than they are now paying and that the economy will be fine if we raise their taxes.

Therefore, raising taxes on the top 1% -- at least right now, and at least in moderation -- really is pretty much a free lunch for the other 99%. Why pass it up? I don't know about you, but when I get a chance to eat a nice lunch on some rich person's dime, I'm happy to accept. (I'm in law school at the moment, so this happens fairly often.)

Having a "free lunch" attitude is only a bad thing if you're just pretending there's a free lunch and it really isn't free because you're just putting it on your credit card. Nothing wrong with enjoying lunches that actually are free.

[(The original) Francis]

While my last class in tax law was over 15 years ago, my recollection is that there are two principal sources of complexity to the body of tax law, which includes the code, regulations, advice letters, administrative law and case law: a. the Congress's never-ending desire to give gifts to constituents; and b. the really complex way in which people earn income and structure transactions.

Blaming all the complexity on Congress is simply wrong; the IRS spends a tremendous amount of time and effort trying to fit all the things people do into the boxes given to them by Congress.

[trilobite]

Daniel, sounds like your problem is with the rhetoric (and the second-hand rhetoric at that, not the rhetoric of actual politicians) and not the policy. Worry about it when it starts harming policy.

[jwo]

Remember the sacrifice we were to make to contribute to the current war? "Go shopping." That is typical of the type of thinking that has been fed to the American people for decades now. The idea that we should truly contribute something, ie, taxes, to cover expenses is no longer a part of the national mentality.

And it is tricky to alter a tax code that in many ways was/is intended to influence behavior. Remember the changes in the tax law in 1986? I was working as a real estate appraiser at the time, and a number of practices that had been encouraged suddenly became expensive, instead of tax-saving. Whole segments of the market just tanked.

So, in my heart, I agree with what you say Sebastian, yet I am unconvinced that it would be anywhere near as simple as you make it sound.

[OCSteve]

Strictly as a sign of personal growth, I hereby recognize that this is a thread I should stay out of.

Not to be taken that I agree with all of this. Just that I am weak and mostly give up. My name is “wuss”. Hear me roar…

[tgirsch]

jwo:

That hits it, and hilzoy alluded to this to. With their supply side BS, the GOP has done an outstanding job of divorcing taxes from the things taxes pay for in the minds of the public. And a disheartening number of Democrats have followed suit. Before we can ever have fiscal sanity, we have to reconnect those two things.

Nobody likes paying taxes, but lots of people like the things that taxes pay for. Social Security, Medicare, and Medicaid are all extremely popular, and when coupled with interest on the national defense, you've got over half the budget. Add in defense and homeland security, and you're up to over 71% of the budget, on just those six categories. Proposing serious cuts to any of those is tantamount to political suicide. (Even Bush's ill-advised social security "reform" was going to cost an additional $2 trillion.)

At the end of the day, I agree mostly with hilzoy, although not entirely. Rather than raise taxes on the top 1%, I'd raise them for the top quintile, although most of that increase would indeed go to the top 5%. Basically, imagine the Clinton-era tax code, but with the current two bottom brackets.

I'd also like to see social security and medicare taxation become less regressive, but that's another matter.

[pi]

Obama is for a US GDP tax. It's foreign.

[david kilmer]

"The idea that we should truly contribute something, ie, taxes, to cover expenses is no longer a part of the national mentality"

This is one of those rare issues where I agree with G. Lakoff's framing. Taxes, he says, are contributions to the "common wealth". I'm sure if you asked Bush's lawyers, they would find the idea of a common wealth "quaint".

Common wealth also provides a nice foundation for progressive tax policies. The people who bring in the most money are the ones who make the most use of (and have the most to gain from) the common wealth -- whether it's infrastructure like roads, rails and wires, or institutions like the Federal Reserve, the USPTO and the FAA.

[crionna]

The people who bring in the most money are the ones who make the most use of (and have the most to gain from) the common wealth -- whether it's infrastructure like roads, rails and wires, or institutions like the Federal Reserve, the USPTO and the FAA.

cite?

Perhaps you mean the most effective use? Let's take the internet for one. I'd agree that on a cash earning basis, Glenn Reynolds probably makes more effective use of the internet than OW. Glenn is wealthy money-wise but the Kitty is wealthy in other ways. Likewise, a traveling salesperson who does very well makes better use of the roads (earnings-wise) than a maid who commutes the same distance. In both cases though, whose fault is that? And why should Glenn or the salesperson be taxed at a higher rate for his/her more effective use? Maybe making it easy (with lower tax implications) for people to use resources poorly is what has gotten us into the mess we're in in the first place.

[rea]

My point is that the Democrats use "tax the top 1%" as an infinite rhetorical piggy bank in the past few years. For every single plan they propose, for every piece of new spending they roll out, for every new middle class tax cut they promise, the answer to "how will you pay for it?" is the same: "increase taxes on the top 1%".

You are a little confused here. You make it sound like the Democrats have been repeatedly increasing taxes on the upper 1% of income. In fact, what has been happening is that the Democrats repeatedly propose increasing those taxes, but it hasn't happeened. Until it happens at least once, complaints like yours are premature.

[Ugh]

End itals?

[Ugh]

.While my last class in tax law was over 15 years ago, my recollection is that there are two principal sources of complexity to the body of tax law, which includes the code, regulations, advice letters, administrative law and case law: a. the Congress's never-ending desire to give gifts to constituents; and b. the really complex way in which people earn income and structure transactions.

A lot of the complexity is a result of taxpayer abuse. The IRS issues regulations, taxpayers figure out how to avoid paying taxes, the IRS modifies the regulations (or other administrative guidance) to combat the abuse, taxpayers move on to other transactions, etc. etc. etc. Unfortunately there's likely no way around this.

One way to increase Gov't revenues would be to double the size of the IRS and jack up the audit rate of small businesses/individuals and increase the staffing of audits of large companies (the Fortune 100, and maybe more, are under continuous audit by the IRS). This would pay for itself many many many times over, without a tax increase (unless you consider people paying what they actually owe a tax increase).

Paying audit staff at the IRS more would help too, to encourage more capable people to do a stint there. Right now, most of them are no match for sophisticated taxpayers, though recently the government has been winning in the courts much more often than it loses (though that's generally the DOJ rather than IRS)>

Also, there's no reason for the giant disparity between the top marginal rate on ordinary income and that on capital gains. It's a massive give away with little rationale.

[bobbyp]

The current tax code is so tilted in favor of the rich that altering it is a matter of justice pure and simple (read "Perfectly Legal" for more detail).

The rich have also enjoyed their own "free lunch" since Reagan, and have enjoyed the benefits of several tax cuts while the boomer flood of FICA contributions have masked the true state of our reckless fiscal profligacy.

It is well past time for the rich to step up and pay us back and rejoin a social contract that they have every intent (self destructively, I would say) to renege on.

[Bernard Yomtov]

One source of complaints about complexity really has nothing to do with the code itself, but rather with record-keeping.

The tax code sensibly enough allows you to deduct business expenses from the income you earn, but requires that you have documentation and adequate records.

For lots of the kinds of people I mentioned above - essentially self-employed professionals - this can be a giant headache. It means keeping receipts for travel expenses, business supplies, and so on. It means dealing, maybe, with the problems of accounting for a home office, and dividing auto expenses between personal and business use.

While all this accounting work is clearly annoying, it's hard to see what the alternative is. A tax based solely on receipts? Not requiring documentation of expenses? What?

[Albatross]

Thanks for the diagram, but I think that it inadvertently misrepresents the situation by granting the same horizontal space to the 1% and .1% populations. I realize you weren't trying to use the X-axis for that purpose.

Here is my own contribution, hastily cut-and-pasted with MS Paint at work, which I think comes closer to representing how many people will be impacted by the various tax plans:

http://tinyurl.com/6kpexc

It STILL overrepresents the Rich and Ultra Rich, but comes a little closer...

[cleek]

mmk. italics must die.

[cleek]

wait... we can embed pictures??

[Gary Farber]

"wait... we can embed pictures??"

That's new; I've tried in the past, and commenters couldn't do it. Or maybe it just didn't work in preview, and I assumed it wouldn't work in fact?