The genius of Obama’s “tax” plan? If you institute new welfare programs, but let the IRS distribute them, you can call them “tax cuts.” (WSJ)
Here’s the political catch. All but the clean car credit would be “refundable,” which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer — a federal check — from taxpayers to nontaxpayers. Once upon a time we called this “welfare,” or in George McGovern’s 1972 campaign a “Demogrant.” Mr. Obama’s genius is to call it a tax cut.
[...]
There’s another catch: Because Mr. Obama’s tax credits are phased out as incomes rise, they impose a huge “marginal” tax rate increase on low-income workers. The marginal tax rate refers to the rate on the next dollar of income earned. As the nearby chart illustrates, the marginal rate for millions of low- and middle-income workers would spike as they earn more income.
Some families with an income of $40,000 could lose up to 40 cents in vanishing credits for every additional dollar earned from working overtime or taking a new job. As public policy, this is contradictory. The tax credits are sold in the name of “making work pay,” but in practice they can be a disincentive to working harder, especially if you’re a lower-income couple getting raises of $1,000 or $2,000 a year. One mystery — among many — of the McCain campaign is why it has allowed Mr. Obama’s 95% illusion to go unanswered.
October 15th, 2008 - 3:50 pm
It seems to me that the marginal tax rate is so high for that range because Obama’s plan is to cut taxes to an extremely low level for folks making < $30k.
I understand that this causes “disincentive” for people in this range to work marginally harder, but if you’re gonna go wicked easy on poor people, at some point tax rates are gonna have to go up pretty sharply as you make more money, no?
October 15th, 2008 - 4:08 pm
Yeah, I think that’s right. Basically, Obama wants a more unbalanced tax structure — this means that poor people get more, but at every step along the way there’s less gain from the next dollar of income.
But more specifically, from the chart it looks like Obama’s plan spikes marginal rates at the very critical point between 25K and 45K - right at the point where you’d want the poor folks he’s trying to help to pull themselves out of poverty. In that, it seems extremely counterproductive.
What I can’t tell from the article is if part of the reason for the sharp spike is that these “credits” are just binary for certain income levels. If so, they’d have a much more damaging effect on incentives than rate drops.
October 15th, 2008 - 7:16 pm
Here is a rebuttal from the blog “Economists for Obama”: Obama’s Tax Plan and Basic Honesty. It references an article that makes arguments similar to this WSJ piece.
Their points are:
and
They had me until “If they do change their behavior … ” I don’t think anyone’s arguing that these folks are specifically going to be any worse off under Obama’s plan, they’re arguing that it’s going to hurt the economy as a whole because of the “disincentives” that it causes. I’m sure that’s true, but to what extent I have no idea. Intuitively I would think his proposed much higher tax rates on rich people would have a much more significant effect on the economy as a whole. But again, I don’t really know. And unfortunately this rebuttal doesn’t address it.
October 15th, 2008 - 7:35 pm
It’s also silly to do this freshman-level behavioral econ analysis with the current state of events as the baseline. The whole point is that families with the opportunity to advance economically would have been able to improve their position in a world of low marginal tax rates.
In a world of high marginal tax rates, they get some benefit now, but maybe they get stuck in this tax bracket forever because they’d lose 40% of every additional dollar they’d earn.
Of course poor people that get a handout now will always be better off than they are at this moment. But are they better off 5/10/15 years out vs. the same elapsed time with low marginal tax rates? Maybe not. Is the economy as a whole better off? Even less likely.
October 16th, 2008 - 1:57 am
By the way, titling that chart “Obama’s Tax Increases” is really misleading and irresponsible. At least it’s an Op-Ed.