Tuesday, September 02, 2008

Obama’s Tax Plan Folly: A Middle-Class Tax Hike

Senator Obama’s proposed ‘tax cuts for the middle class’ are actually marginal rate hikes in disguise.
Senator Barack Obama declared recently that he wants to “reform our tax code so that it rewards work and not just wealth.” We think that is a great goal if it means a simple tax system with low marginal tax rates. Unfortunately, a close inspection of Obama’s proposals reveals something disquieting: he would raise marginal tax rates for many middle-income taxpayers, a bad move for anyone seeking to promote economic growth (see chart above).

Read more here
of the American Enterprise Institute article.

Note that for tax year 2006, the median Adjusted Gross Income (AGI) for American taxpayers was $32,000. Since median income is the statistical definition of "middle-class," that group will experience a whopping increase in effective marginal tax rate from about 20% to 35% under the Obama tax plan (see chart above).

39 Comments:

At 9/02/2008 10:15 AM, Anonymous Anonymous said...

"Reducing a person’s tax credit as his income goes up also reduces his incentive to earn more income. "

Really? I haven't heard of many ordinary people saying "I'd rather pass on that raise/bonus because it will raise my taxes".

And then we look at the staff working at AEI:

Lynne Cheney
Newt Gingrich
Richard Cohen
Richard Perle
John R. Bolton
Paul Wolfowitz

Gee, I wonder if this is an objective assessment or not?

 
At 9/02/2008 10:46 AM, Blogger Thomas Blair said...

Anyone know why, according to this chart, marginal income between ~$44k and ~$47k isn't taxed? I'm perplexed.

 
At 9/02/2008 10:50 AM, Anonymous QT said...

Fair point, this organization is not exactly unbiased.

Obama however, has to have some way to finance his programs. The Obama tax plan uses comparisons to the tax rates under Ronald Reagan rather than under the Bush tax cuts which he plans not to renew.

Common sense tells us that the tax rates were higher under Reagan and that a broad tax base is required to finance public programmes such as social security, defense, education, health care, public transit, infrastructure, etc. since hiking taxes on the rich and large corporations will not generate sufficient revenue to finance Obama's ambitious agenda.

There is no free lunch. Take a good look at the fine print when a politician starts tempting you with your own money.

 
At 9/02/2008 10:53 AM, Anonymous EJ said...

anon 10:15,

Its true that AEI isnt exactly impartiol, but simply attacking that is an ad hominom logical falicy. You need to critique the message for what it is if you disagree, not the messanger.

 
At 9/02/2008 10:59 AM, Blogger Ironman said...

Of course, what's being missed is the reason why those between $25,000 and $45,000 are being targeted for the biggest tax rate increases: collectively, the individuals and households in this income range generate more income to be taxed than all others in the U.S.

It's like they have a huge bullseye painted on them where politicians with big plans for big spending are concerned!

 
At 9/02/2008 11:02 AM, Anonymous Fred said...

Anon,

If you don't know anyone who passed on more work for less reward it's because you haven't lived in an environment with excessively high taxes, thank Reagan.

Even the most casual review of the effects of FDR's extreme tax rates of the thirties will show how destructive taxes can be to wage earners and the private economy.

 
At 9/02/2008 11:12 AM, Anonymous Anonymous said...

Though it technically wasnt a tax, back before i went to college, I learned that the FAFSA formula for federal student aid "phased out" as you made more income in a year as a student. Now i had worked a lot the year before so i was losing 50 cents in aide for every dollar of income i made based on the formula. So I intentially quit my job two months early and sat on my butt for the summer because betwene taxes, lost aide, and tranportation costs to work (though gas was a lot cheaper then), i was keeping only about 18%on my dollar and therefore wasnt worth me giving up my time. So there is my anedotal eveidence of reducing work though high marginal rates of tax equivelents.

 
At 9/02/2008 11:23 AM, Anonymous Anonymous said...

Yeah but lets be honest; in general does the average person turn down a job that will move them up a tax bracket? Does the average person NOT play the lottery or go to Vegas just because the winnings taxed at a ridiculous rate?

We've had a progressive tax for a long time and we've had no shortage of wealthy individuals. In fact, there's some evidence that wealth is more concentrated now than ever. So the argument that a progressive tax reduces a person's incentive to earn more income is BS; you're still making more money net.

Seriously, did Bill Gates or Steve Jobs say 'Well, if I make any more, I'll be taxed too much, so I'll just stop here."?

But what I really don't understand, maybe this assessment is accurate, but 1) it deals with a very specific case, and 2) it doesn't delve into enough specifics to be able to sort it out from partisan nonsense, especially when its at odds with the so-called 'objective' sources.

Taxes are freakin' complicated, and I think a lot of people would like to know what both candidates plans honestly would look like. Of course, I would like to know how they are going to pay for them too, and please don't say 'trickle down'.

 
At 9/02/2008 12:11 PM, Anonymous RebelRenegade said...

I'd like to see this same chart done for McCain as well.

 
At 9/02/2008 12:47 PM, Anonymous Kevin said...

"So the argument that a progressive tax reduces a person's incentive to earn more income is BS; you're still making more money net."

Wrong Anonymous! It impacts my behavior as a self-employed person and I know others who behave similarly. Ever heard the expression - if you tax something, you get less of it?

 
At 9/02/2008 12:58 PM, Blogger juandos said...

"Taxes are freakin' complicated, and I think a lot of people would like to know what both candidates plans honestly would look like" ad hominem anon @ 11:23 AM whines...

Well there you go, a homework assignment you can sink your venom into...

From the Tax Foundation... You might notice the graphic in the article it just might look familiar...
The Obama Tax Plan: High Tax Rates Are Not Just for High-Income Taxpayers

Senator McCain’s and Senator Obama’s Tax Plans: Different Roads Taken

BTW what do the names you listed have to do with Alex Brill and Alan D. Viard?

Are you implying that the names you listed have final say in what's written up at the American Enterprise Institute?

Oh yeah, one more thing, don't think McCain is going to be cheaper than Obama if McCain wins and gets his way: McCain-Lieberman: Then and Now...

Both these clowns have plans for screwing up the economy...

 
At 9/02/2008 1:21 PM, Blogger Robert said...

I personally know of someone that tinkers with what he makes to avoid paying in based on the exemptions he has for his 4 kids.

 
At 9/02/2008 1:43 PM, Anonymous Anonymous said...

As usual, Carpe Diem is late to the party. Mankiw posted the chart on August 13, 2008, and the blogosphere ripped him.

The WaPo is more enlightening.

Obamanomics doesn't increase income taxes on the middle class, and, in particular, University of Michigan, Flint Campus, professors.

 
At 9/02/2008 1:56 PM, Anonymous Anonymous said...

"if you tax something, you get less of it?"

GDP is essentially taxed. Yet GDP continues to grow. All income is taxed, yet people continue to strive to make more money. Gasoline has been taxed for years and only recently have we seen consumption actually fall (due to absolute prices, not tax).

"BTW what do the names you listed have to do with Alex Brill and Alan D. Viard?"

Alex Brill: In 2006, Alex served as top committee staff negotiator for the Tax Relief and Health Care Act, Pension Protection Act and Tax Increase Prevention and Reconciliation Act. The pension bill is the most significant rewrite of pension legislation in over 30 years, and the $70 billion Reconciliation Act extended the capital gains and dividend rate cut through 2010, along with ensuring 15 million taxpayers would avoid being pushed onto the alternative minimum tax (AMT). Prior to serving on the Committee on Ways and Means, Alex served as an economist at the White House Council of Economic Advisers.

Alan Viard: Prior to joining AEI, Alan Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also worked for the Treasury Department’s Office of Tax Analysis, the White House’s Council of Economic Advisers, and the Joint Committee on Taxation of the U.S. Congress.

So two economists from the Bush administration's panel of economic advisers offer an objective assessment, including one who worked on major piece of tax-cutting legislation?

 
At 9/02/2008 2:24 PM, Blogger juandos said...

"The WaPo is more enlightening."

Yeah, if you like fairy tales...

"Obamanomics doesn't increase income taxes on the middle class"...

Hmmm, you really do like fairy tales...

"GDP is essentially taxed"...

Hmmm, lot a lee way there when you use the word, "essentially"...

"All income is taxed, yet people continue to strive to make more money"...

Got to make up for those extorted tax dollars somehow...

"So two economists from the Bush administration's panel of economic advisers offer an objective assessment, including one who worked on major piece of tax-cutting legislation?"...

So basic economics shouldn't be used it either advising a President or writting a commentary when its about economic plans?

Are you complaining that these two figured out a way for the federal government not to steal every last dime people make?

Do we really need more big government expansion?

Your apparent attitude about taxes tends to remind me of this Dr. Walter Williams commentary...

 
At 9/02/2008 2:37 PM, Blogger briefs said...

I posted on that same issue back a couple weeks ago and got slammed by a bunch of Phd weilding commenters suggesting I didn't know anything about anything.

So, I'll be honest I don't get the IRS or taxes, totally right. But if taxes go up and government gets bigger, I'm against it. If taxes go down and government spends less, I'm for it. Pretty naive I guess. I'm sure the experts will tell me why that's a foolish small minded position to take.

 
At 9/02/2008 2:38 PM, Anonymous rvturnage said...

Anon said: "Yeah but lets be honest; in general does the average person turn down a job that will move them up a tax bracket?"

Maybe. But most certainly they don't work more (overtime, second job) if it it means they get to keep less of their earnings.

And probably, if the jobs pay increase was enough to move them into another tax bracket that would substantially reduce the percent of additional income they got to keep while at the same time the new job was less rewarding and/or required more effort by the person...then yes, quite a few would turn it down.

 
At 9/02/2008 2:42 PM, Anonymous Anonymous said...

""GDP is essentially taxed"...

Hmmm, lot a lee way there when you use the word, "essentially"..."

Yes, because GDP is multiple components, of which includes gov't spending, which is obviously not taxed.

"So basic economics shouldn't be used it either advising a President or writting a commentary when its about economic plans?

Are you complaining that these two figured out a way for the federal government not to steal every last dime people make?"

No, all I'm saying is that Mr.Brill and Mr.Viard may have other motives besides pure objectivity in their portrayal of Mr.Obama's proposed policy. I say this because other analysis of his proposed tax policy do not tend to show the same conclusions. I also notice that neither author as far as I know has compared McCain's plan in the same situation, nor have they offered any estimates on the cost of each candidate's respective plan.

I understand you do not want more taxes, but I assume you also want fiscal responsibility, right? That would mean that McCain needs to propose some major spending cuts to make up for his plan, and certainly Obama needs to as well.

My point is, Prof.Perry cites an article by AEI, an organization that has a decidedly partisan staff, written by two Bush economists. That casts some doubt on the credibility of the authors objectivity in evaluating Mr.Obama's plan.

 
At 9/02/2008 2:51 PM, Anonymous Anonymous said...

"But if taxes go up and government gets bigger, I'm against it. If taxes go down and government spends less, I'm for it."

What if taxes go down, and gov't gets bigger (like the last 8 years)? What if taxes went up, but the gov't actually got smaller?

There used to be this magic idea that Republicans were for lower taxes and smaller government. And conversely that Democrats were for higher taxes and bigger government. But in reality, both parties will deficit-spend, as they both historically have.

Who was the last President to make the government materially smaller? Certainly the latest increase in government, the Dept. of Homeland Security, has been under the Republican watch.

 
At 9/02/2008 3:24 PM, Anonymous Anonymous said...

But in reality, both parties will deficit-spend, as they both historically have

The elephants consistently outspend the donkeys, at least post-WW11.

The estimated costs to the Treasury over the next decade according to The Tax Policy Center are $4.2 trillion for McSameonomics and $2.9 trillion for Obamanomics.

Now the response to the Obamanomics increases in income taxes on the top 5% of income earners is that high income/high net worth Americans will hightail it out of here. Don't think so - the exit tax makes it very painful. Bush43 signed it; I propose to paint it as the initial version of the Decline of the American Empire Act.

 
At 9/02/2008 5:27 PM, Anonymous QT said...

Personally, I am relieved to hear that the middle class will be contributing to Senator Obama's vision. You pick it; you pay for it.

Canada is still paying for its late, great visionary Pierre Elliot Trudeau. Like the comic impressionist said "I united all Canadians with a national debt."

You may just be the change you have been waiting for...either way, you are going to be picking up the bill.

Read the fine print on both of these fine gentlemen and in the words of Robert Graves "Trust no one".

 
At 9/02/2008 6:28 PM, Anonymous Anonymous said...

The new Google browser does not open the links although they open fine on the same computer in Firefox or Internet Explorer.

 
At 9/02/2008 8:48 PM, Blogger OBloodyHell said...

> In fact, there's some evidence that wealth is more concentrated now than ever.

OK, logic boy:

How does *income tax* affect this?.

It ain't doing jack SHIT to the ones who already have money, genius.

The really rich ones don't have incomes, they have RETURNS ON ASSETS which aren't taxed the same way.

This is assuming your "wealth is more concentrated" assertion is accurate, which is highly debatable in and of itself.

===

And if people don't turn down a raise, in some cases it's probably because most of them don't have any awareness of how much they pay in taxes or how said raise will affect their post-tax income, thanks to the subtle way income taxes are removed from your paycheck.

 
At 9/02/2008 8:59 PM, Blogger OBloodyHell said...

> Seriously, did Bill Gates or Steve Jobs say 'Well, if I make any more, I'll be taxed too much, so I'll just stop here."?

No, what they did was arrange to get the wealth in some form other than income -- stock options, say, or something they didn't have to pay taxes on, perhaps by receiving it outside the USA in a manner not covered by US Tax law.

Or is that too bloody obvious?

The other technique is to put your wealth into a tax-free foundation, which is how The Really Really Rich have been doing it since the Income Tax laws were put into affect almost a century ago. Perhaps you've heard their names when you've been watching PBS: The MacArthur Foundation, the Rockefeller Foundation, the Ford Foundation, the Kellogg Foundation...

... and then there's
The Bill & Melinda Gates Foundation -- with a paltry 40 billion dollars in it.


You still control it, which is the point when you are talking about money over 10 million or so in current dollars... because you probably won't be spending it all in your lifetime.


Starting to get the picture?

 
At 9/02/2008 9:09 PM, Blogger OBloodyHell said...

> GDP is essentially taxed. Yet GDP continues to grow. All income is taxed, yet people continue to strive to make more money. Gasoline has been taxed for years and only recently have we seen consumption actually fall (due to absolute prices, not tax).

"If you tax something you get less of it".

What part of "less" translates into "none" in your head?

Is this the same sort of reasoning which works when buying a house these days? "Well, we'll charge you 'less' per month if we can apply a longer term and a higher interest rate to your home loan" -- is that the same to you as charging you "no more"?

And Autos -- "Your lease payment will be 'less' if we increase your interest rate and add another year onto the payments"... does this translate into your paying "no more"?

Just trying to figure out how you manage to make the statement you made in response to kevin's statement. Please clarify the reasoning process, such as it was. I need a good laugh.

The biggest problem with Logic is GIGO, and how few people grasp it when it's happening.

 
At 9/02/2008 9:12 PM, Blogger OBloodyHell said...

> I posted on that same issue back a couple weeks ago and got slammed by a bunch of Phd weilding commenters suggesting I didn't know anything about anything.

briefs, please point to the entry in question, so someone (if not me) can tell you where the difference lies.

I ain't no PhD but I might be able to help.

 
At 9/02/2008 9:23 PM, Blogger OBloodyHell said...

> and certainly Obama needs to as well.

When a Democratic group proposes major spending cuts it will be a particularly good idea to invest in BAR-B-Q pork wing futures and heavy duty umbrellas (for protection from the droppings falling out of the sky).

As the Cold War ended, the Defense budget was slashed radically, since we no longer needed military expenditures to match that of the old USSR. Did we thus cut taxes across the board, since we clearly had a major amount of no-longer necessary income to be spent? Did we switch a large chunk of the collected taxes to paying down the national debt, perhaps, instead of such cuts?

Uhhhh, does The Pope Shit In The Woods?

No, don't be ridiculously silly! Of course they didn't cut taxes or shift income to pay down the debt!!

If you look at the budget for HEW and such in 1991 vs, oh, 1994, you'll see exactly what happened to the excess.

And it's quite clear -- Obama doesn't have any interest in cuts of any kind. He doesn't want to raise taxes for the purpose of balancing the budget, or for the purpose of paying off the debt.

=============================
He wants more taxes in order
to pay for more programs.
=============================


Pardon me if I'm not enthused by that idea.

 
At 9/02/2008 9:32 PM, Anonymous thomas blair said...

And if people don't turn down a raise, in some cases it's probably because most of them don't have any awareness of how much they pay in taxes or how said raise will affect their post-tax income, thanks to the subtle way income taxes are removed from your paycheck.

Oy, vey! I, for one, would love to see withholding evanesce, replaced by a single checks written to federal, state, and local treasuries every April 15th. If only people knew just how much of their income was being stolen from them...

I'll do you one better - move the tax date to the last Tuesday in October and watch incumbent politicians mess their knickers.

 
At 9/02/2008 11:04 PM, Anonymous Anonymous said...

11:23 said

"Yeah but lets be honest; in general does the average person turn down a job that will move them up a tax bracket?"

I'll give you an example of just such an event.

I make about $275,000 a year. Yes I am one of those awful, awful rich people democrats so love to hate. My wife doesn't work. Last year though she was offered a job that she was interested in. Not so much because we needed the money but because she wanted to work and it seemed like a fun job.

However, because her salary would be taxed at my marginal tax rate, both federal (33%) and state (6%) and because she would have to pay SS and Medicare tax on 100% of her income (7.45%), her effective and marginal tax rate would have been 46.45%.

And because of that she said screw that and ended up not taking the job. And I can't say I blame her. I would have said no too as it would have meant working 5 days a week or which 2.5 of those days would have been working for the government.

When taxes are raised to the point where you work 1/2 the time for the government, you stop working. I don't see why it's so hard to fathom.

 
At 9/03/2008 5:36 AM, Anonymous Anonymous said...

"I make about $275,000 a year."

Did you always make that much? If not, clearly there was *enough* incentive for you to continue climbing tax brackets, even though your tax credit was continually reduced. Yet according to theory, you should have not wanted to. I'm assuming you have a job that required some effort and dedication to obtain, as well as some time in some lower-paying roles.

Everyone wants to make more money, especially if you are like majority of American's making the median income, which is far, far less.

 
At 9/03/2008 5:46 AM, Anonymous Anonymous said...

"Reducing a person’s tax credit as his income goes up also reduces his incentive to earn more income."

Again, I ask, if this is a true statement, why do we see "made millionaires" and billionaires in this country, like Bill Gates, Steve Jobs, etc? These are people that traversed several tax brackets (or maybe even all of them) in their lives, so they clearly continually had enough *incentive* to earn more income. Its only when you earn less net income, or that the effort exerted isn't worthwhile that its an actual problem.

Therefore the fact that we continue to have these entrepreneurial success stories should suggest that the tax gradient in America is perfectly fine as we are not lacking in these stories. In fact, didn't MP just post an article about how people are more mobile between quintiles?

 
At 9/03/2008 9:39 AM, Anonymous Anonymous said...

Did you always make that much? If not, clearly there was *enough* incentive for you to continue climbing tax brackets, even though your tax credit was continually reduced. Yet according to theory, you should have not wanted to.

No. This is wrong. Different people have different priorities. Some will continue to work to obtain more money, even if it is taxed at a higher rate. However, this number becomes less and less as you move up the tax bracket, and everyone has a point at which they stop. An analysis of the extremes exemplifies this. For example, if money is taxed at 100% at the extreme of income, no one will pursue it. All will stop attempting to make more money. If it is 0%, obviously, many more will continue to puruse this, because they get to keep their money.

I, currently, am not satisfied with my level of income and will continue to strive to make more despite the disincentive to do so by the income tax bracket. However, I and many people will eventually reach a point where I am comfortable and stop. Just because you have pointed out some people that are not as deterred by the disincentive of taxes as others does not negate the theory. In fact, you have bolstered it, as there are less and less people who are truly attempting to move up in class as you approach the top of the bracket.

 
At 9/03/2008 10:00 AM, Blogger Thomas Blair said...

Anonymous still doesn't get it.

When you tax something, you get less of it. In what world does less mean none?

All of your supposed counter-examples about the existence of made millionaires and people who work do nothing to disprove the theory because they don't address the theory. But a single example of someone not taking on work because of the disincentives of taxation demonstrate the theory. Actually, we do know that the pay structure for executives is adjusted to take advantage of the fact that income is taxed at a certain rate, whereas capital gains are taxed less. What do we find? That executives structure their pay packages to provide the types of earnings that are not taxed as much.

A very common scenario: Husband and wife both work just after marriage. They have kids. Wife stays home to mother children. When deciding whether to go back to work once the kids are done with diapers, she weighs her potential income against the costs of working. Those costs include not only taxes (which are often calculated at the husband's marginal rate due to that lovely marriage penalty), but other costs of working, like childcare, professional clothing, additional gas money, time away from children/family, and less free time for oneself. Are you really trying to say that there are no cases when losing 15-45% of that potential additional income to taxes wouldn't dissuade a woman from returning to the workforce?

 
At 9/03/2008 10:18 AM, Anonymous Anonymous said...

"Just because you have pointed out some people that are not as deterred by the disincentive of taxes as others does not negate the theory."

Because I've pointed out that the vast majority of the population is a counter-example, I think the theory is negated.

In your case, if there was a flat tax, you would have no disincentive, right? With the graduated tax system, which we have had in place for a long time, yes your rate goes up, but your net income after taxes does as well, which is exactly why people continue to seek better paying jobs. The current tax system is not that big of a penalty to be a disincentive to making more money for the majority of average people. Nor is it enough to be a disincentive at the top end as we now have a record number of billionaires.

 
At 9/03/2008 10:23 AM, Anonymous Anonymous said...

So the answer to this tremendous 'disincentive', is of course a flat tax, right?

Or better yet, why even have taxes at all? Why not just go all-out anarcho-capitalist?

 
At 9/03/2008 10:39 AM, Blogger Thomas Blair said...

Or better yet, why even have taxes at all? Why not just go all-out anarcho-capitalist?

Given that taxation is theft, I see nothing wrong with this.

 
At 9/03/2008 12:48 PM, Anonymous Anonymous said...

""Or better yet, why even have taxes at all? Why not just go all-out anarcho-capitalist?"

Given that taxation is theft, I see nothing wrong with this."

Even with your hired mercenaries to defend you, its still not going to work. You'd end up with a situation like in Nigeria right now; the poor would quickly form some type of MEND-like organization. Seeing as how the private companies in Nigeria can't defend their interest with their mercenaries now, I'd hardly expect a well-to-do individual to do much better.

 
At 9/04/2008 8:51 PM, Blogger juandos said...

So when a socialist's first few incomprehensible statements don't make any headway, why not lie outright?

"Even with your hired mercenaries to defend you, its still not going to work. You'd end up with a situation like in Nigeria right now; the poor would quickly form some type of MEND-like organization. Seeing as how the private companies in Nigeria can't defend their interest with their mercenaries now, I'd hardly expect a well-to-do individual to do much better"...

ROFLMAO!

Private companies in Nigeria that have the money are doing quite well by their mercs...

Blackwater got yet another lovely contract over there for (dare I say it?!?!) an oil company...

 
At 11/02/2008 8:33 AM, Anonymous Anonymous said...

Maybe a person wouldn't turn down a raise to avoid higher tax rates (or maybe they would - we'll see when the tax rates are finalized). But another important thing to look at is whether a person would take the risk to start up or expand a small business (and providing jobs) when their income would be taxed at a much higher rate - especially if they have to borrow money.

 

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