Sunday, October 19, 2008

Why Joe had a point

In response to a post last week on Obama's tax plan, one reader sets fervently sets forth the politics of the Obama idea:

Obama's tax plan will not increase taxes for anyone making less than $250,000. Let me repeat that: Obama's tax plan will not increase taxes for anyone making less than $250,000.

There was no need to repeat it. It's being repeated over and over again. Here are the problems:

1. I don't believe it. The Democrat leaning Tax Policy Center says that Obama's plan will add almost three trillion dollars to the deficit and, of course, Obama proposes almost a trillion in new spending on top of that. The TPC says that McCain's plan doesn't add up either, so we know that neither one of these guys will do exactly what they say.

2. Obama's rhetoric and record points to more taxation.. Obama's underlying political philosophy - to attract votes by taking from a few Peters to pay many Pauls - suggests what he would do. If it's OK to raise taxes on the top 5% to give money to others, then why not the top 10,15,25,or even 40? The idea is that Obama's instincts are to raise spending and taxes. McCain's are otherwise.

3. Obama's instincts are anti-growth. Higher marginal tax rates, all else equal, create disincentives for work or investment and incentives for unproductive tax avoidance. Of course, there may be reasons to raise them and one reason might be to reduce the deficit, but that's not Obama's reason. I might buy into small increases in marginal rates to bring government's expenditures more in line with its revenues, but Obama simply proposes to redistribute the wealth.

This is, I think, more likely to create less income than more.

That doesn't mean, as the commenter suggests, that I oppose public education or a public safety net. But those things exist and no one is proposing to do away with them.

4. The third rail remains untouched. The greatest policy failure of may generation has been the repeated refusal to deal with the coming entitlement crisis. Obama's suggestion - lifting in some way the cap on social security taxes - is a potentially disastrous disincentive to growth.

5. Obama's America is further divided into tax payers and tax recipients. One of the impact of the GOP's relentless "tax cuts for the rich" is to remove large numbers from the income tax rolls altogether. Both McCain's and Obama's proposals would increase that number from approximately one third of all filers to something approaching 50%. Obama exacerbates the problem by increasing the number who receive a government check. Do we really want large numbers of voters - perhaps a majority - to be net recipients of government largesse?

6. Obama will have to feed a hungry Congressional majority. Apart from Obama's own political proclivities, it looks like he will have large Democrat majorities in both the House and the Senate. Having been out of power for so long, there is going to be a great deal of pent up demand for new programs.

All of this was, I think, captured in Obama's answer to the now iconic Joe the Plumber. He wants to "spread the wealth around" as it is all his to bestow.


Anonymous said...

It appears that the next logical step in the Obama mind would be to abolish private property because the power to tax means that it's all the govermnents anyway.

Anonymous said...


Your first point is the only one you needed: You don't believe Obama. Further replies would be futile because, regardless of what is said, you don't believe what Obama says, much less what unauthorized defenders might say on his behalf.

One cannot have a productive discussion with another who's opening premise is they don't believe what you say. Any reply–even a perfectly valid one–is futile.

sean s.

Anonymous said...


With regard to point number 5, that and legalization of drugs is all you need to get to 1984.

Crazy Politico said...

The whole idea of 50% of the income earners becoming 'tax receivers' is to get to a tipping point where you assure you (or your party) of 50% of the vote by claiming the other guys will take your free government money check away.

Sadly, I see us becoming Italy circa 1983 soon.

Michael J. Mathias said...

The tax rate was increased twice I believe during the 1990s--a period of rapid economic growth and prosperity in this country.

The investments the government will make during the next four years (and there is no reason to believe that McCain also wouldn't raise taxes)will spur growth. Taxes aren't saved by the government--they get invested in local economies, building roads, funding medical research projects, and in all sorts of other ways that end up, eventually, as paychecks.

The suffering of the economy during the next few years will be related to the credit markets--and it's not clear to me that that the government can do much about that.

Rick Esenberg said...

Sean S

If someone makes implausible claims about what he or she will do, I think I am entitled to question it. Obama's plans do not cohere and I think that pointing that out is the beginning of conversation, not the end of it.

I offered a quite detailed explanation of why I don't believe Obama. If someone doesn't agree and wants to respond, I have certainly set forth my reasons.

Anonymous said...

OK. Time for a reality check.

Between 1940 and 1950, real Gross Domestic Product in the United States rose at an average annual rate of 5.56%. Top marginal federal income tax rates during that decade ranged between 82.13% over $200,000 and 94% over $200,000.

Between 1950 and 1960, real GDP rose at an average annual rate of 3.48%. Top marginal federal income tax rates ranged between 91% and 92% over $400,000.

Between 1960 and 1970, real GDP rose at an average annual clip of 4.19%. Top marginal federal income tax rates ranged between 71.75% over $200,000 and 91% over $400,000.

Between 1970 and 1980, real GDP rose at an average annual rate of 3.19%. Top marginal rates ranged between 70% over $200,000 and 71.75% over $215,400; maximum rates on earned income in some of those years were either 50% or 60%.

Between 1980 and 1990, real GDP rose at an average clip of 3.26%. Top marginal rates ranged between 69.125% over $215,400 and 28% over $32,450.

Between 1990 and 2000, real GDP rose at an average rate of 3.28%. Top marginal rates were between 28% over $32,450 and 39.6% over $288,350.

Between 2000 and 2007, real GDP rose at a rate slower than any of the above periods, namely, 2.32%. Top marginal rates ranged between 39.6% over $288,350 and 35% over $349,701.

Higher marginal income tax rates undoubtedly do have an impact on incentives to work. But, as the above historical data show, high marginal tax rates on rich people are not necessarily correlated with periods of low economic growth. To the contrary, the current low marginal income tax rates (relatively low by historical standards) on rich people appear to be correlated with lower economic growth. There are undoubtedly other factors at play. Princeton's Professor Alan Blinder has made a compelling case that periods of greater income inequality are correlated with lower economic growth.

The argument that the relatively modest changes Obama proposes making to top marginal federal income tax rates -- changes that still put the top rates below the rates in effect for almost every period since the Great Depression -- will result in a major downtown in economic growth, simply isn't supported by the historical evidence.

Rick Esenberg said...

Anon 1:10

I don't think that there is a simple relationship between tax rates and growth but there are a few things that you miss. First, the pre-1986 tax code was far more heavily ladened with tax avoidance devices than the current one. Few people actually paid those confiscatory rates.

Second, by starting at 1980, you miss the substantial economic growth combining low levels of inflation and unemployment that followed the Reagan tax cuts.

I do not believe that a few percentage points on earnings over 200k would be disastrous. It might even be useful if it funded a reduction in the deficit. But, for reasons I explain, I don't expect that to be the extent of it.

Anonymous said...

Rick: Thanks for bringing up that point about looking more specifically at time periods in the 1980's. A closer look at tax rates in effect during the 1980's and early 1990's actually confirms my point.

From 1982 to 1986, Reagan's first set of tax cuts was in place. Under that regime, the top marginal rate was 50%, and that rate kicked in at $85,600 (in 1982) -- a threshold that was gradually increased to $175,250, in 1986. During that period, real GDP grew at a remarkable annual average rate of 4.82%.

Then the second set of Reagan/Bush 41 tax cuts kicked in. From 1987 to 1992, the top marginal rate went from 38.5%, to 28% (subject to a surcharge up to 33% for earners in the next bracket, then back down to 28%), to 31%. These rates were effective at rather low thresholds, between $29,750, at the start, up to $86,500.

And what was average real GDP growth during that period, with all that impetus of extraordinarily low top marginal income tax rates?

A paltry 2.53%.

You are correct that with extremely high ordinary income marginal rates, there were more tax avoidance games played back in the day. But most of them involved somehow turning ordinary income into capital gains. It's important to keep in mind that capital gains rates were higher back then, as well. Long-term capital gains were taxed at a top marginal rate of 25% from the 1940's until the late 1960's, when they began to creep up to a peak rate of 39.9% -- which is (a tad) higher than the very top rate on ordinary income Obama proposes to impose! The capital gains rates Obama proposes are lower than the capital gains rates in effect from the 1940's through the 1980's.

Peter said...

Higher tax rates are not necessarily disincentives to earn income/work. It is true - as Rick said, all things being equal - in the microeconomists' basic model. But there is nary an economist that can demonstrate a perfect duplication of such a model in the real world. That's because in the real world, not all things are equal.

Time to move your tax analysis beyond microecon 101.

tom paine said...

crazy politico said...

"The whole idea of 50% of the income earners becoming 'tax receivers' is to get to a tipping point..."

Just curious, but please give us the exact source (date, place, person) when the "idea of 50% of income earners becoming tax receivers" was ever said or proposed by Obama?

Or is that simply your opinion?

Anonymous said...

how did this clown land a job at marquette university? i guess the standards aren't what they use to be. the courts are the last vestige of justice. justice. a long ago word lost in translation. how did this fool get linked to the journal-sentinel a once great paper. oh, once again standards; jounalistic standards lowered beyond forgotten expectations. milwaukee is a great place to live. our county is about to change for the better and fools, even fools who suffer poor students should change the old ways of division and join the rest of us in building a brighter future. Obama is this generation's hope for the future and anything to the contrary is selfserving denial. either get on or get the hell out of the way.