Top Tax Rates Won't Rise As Much As Expected If Senator Obama Wins
Investors breathed a sigh of relief this morning when they read the Wall Street Journal's op-ed from Senator Barack Obama's (D-IL) top economic advisers, Jason Furman and Austan Goolsbee, stating explicity for the first time what top tax rates Mr. Obama would support if elected president. The current 15% top rate on dividends and capital gains would rise to 20%, and the 35% top individual income tax rate would rise to 39.6%. The payroll tax increase for those with earnings over $250,000 annually would not occur for at least another decade and would be between 2% and 4% of combined employer and employee tax. Until today, most investors had expected Senator Obama to propose top rates of at least 25% on dividends and capital gains and a top individual income tax rate over 40%. They also expected the full 12.4% Social Security and Disability payroll tax to apply to earned income over $250,000. Currently, the payroll tax cuts off at $102,000.
Senator Obama's advisers stressed several times that their modest tax increases for high income individuals were more than offset by middle class and small business tax cuts so that overall federal revenues under their plan would amount to 18.2% of GDP, slightly lower than today's 18.3% level. The Urban-Brookings Tax Policy Institute still estimated a net tax cut from present law, assuming no extension of President Bush's tax cuts, of $2.9 trillion over the next 10 years yielding average revenues of 18.2% of GDP over that period. His plan would raise $627 b. over 10 years if you assume President Bush's tax cuts are extended. The Tax Policy Center also estimated the percentage tax change by cash income class versus a baseline which assumes President Bush's tax cuts are extended. This shows the redistribution of tax burden from 14.2% of taxpayers, mostly with incomes over $250,000, to those 76.6% of taxpayers, mostly below. After-tax income would rise 8.6% for those with cash income under $10,000, 3.6% for those between $20,000 and $30,000, and 1.7% for those between $50,000 and $75,000. After-tax income would fall by 1.5% for those between $200,000 and $500,000, 5.6% for those between $500,000 and $1 million, and 11.3% for those over $1 million.
Senator McCain (R-AZ) would keep present law top tax rates of 15% on dividends and capital gains and 35% on high income taxpayers. He would also eliminate the Alternative Minimum Tax. He would avoid tax increases and would give tax cuts to just over half of all taxpayers, as compared to the same baseline that extends President Bush's tax cuts. The largest increases in after-tax income are concentrated among those with high incomes. According to the Tax Policy Center estimate, his plan would raise after-tax income of those with cash income over $1m by 2.5%. Senator McCain's plan would cost and estimated $4.2 trillion over the next 10 years assuming no extension of President Bush's tax cuts with average revenue of 17.6% of GDP. McCain's tax cuts would cost $596 b. over 10 years if you assume President Bush's tax cuts are extended.
McCain would cut the top corporate income tax rate from 35% to 25%, and Obama would leave it at 35%.
Investors and high income individuals are clearly better off under Senator McCain's tax policies, and middle and lower class individuals are clearly better off under Senator Obama's tax policies.
Something's got to give
Investors happy. People who are riding on the national health care promise, maybe not so much. Like Krugman, even before this:...
Barack Obama’s tax plan is more responsible than Mr. McCain’s ... also far more progressive ... [but] not enough to pay for universal health care, which was supposed to be the overriding progressive priority in this election. Why doesn’t Mr. Obama propose raising more money?
And that was back when Krugman was assuming the Obama plan would raise revenue, not reduce it as per...
"Senator Obama's advisers stressed several times that their modest tax increases for high income individuals were more than offset by middle class and small business tax cuts so that overall federal revenues under their plan would amount to 18.2% of GDP, slightly lower than today's 18.3% level."
(Krugman of course told the Asia Times "We should be getting 28% of GDP in revenue", ten points more than now -- which would be something!)
In these campaign promises, something has got to give.
We can cynically assume that campaign talk simply means nothing at all, candidates will just say whatever they need to say to get elected -- from FDR promising in '32 to balance the budget by getting rid of excess government job-holders, and promising in '40 to keep America's sons out of foreign wars, through Nixon's "plan" to get the US out of Viet Nam in '68 and Clinton's "middle class tax cut" in '92, and all the rest. (Though maybe it's not cynical to be realistic.)
Or we can say that campaign promises actually mean something, or at least should -- they should strengthen the elected by providing a mandate: "I said I was going to do this if elected, and you elected me, so now I am going to do it!"
But when the mandate is: "I said I was going to give you something valuable, and that I was going to lower taxes so you don't have to pay for it ..." well, if Obama is elected and then tries to get universal health care enacted, that is going to not help ... and in the larger picture, this is just more travel down the same road that's given us the $50 trillion unfunded entitlement liability.
Same old politics. But there is going to come a day when something will have to give.
A bit of irony too
There is a bit of irony in this op-ed too.
While not mentioning a single word about how they are going to meet Krugman's concern about raising the revenue needed to pay for Obama's promised universal health care program through a net tax cut, they make the solemn statement...
Sen. Obama believes that responsible candidates must put forward specific ideas of how they would pay for their proposals.
... then attack McCain for doing just that.
Sen. McCain's plan does include one new proposal that would result in higher taxes on the middle class. As even Sen. McCain's advisers have acknowledged, his health-care plan would impose a $3.6 trillion tax increase over 10 years on workers ... Even after accounting for Sen. McCain's proposed health-care tax credits, this plan would eventually leave tens of millions of middle-class families paying higher taxes.
McCain proposes a limited health care reform, that will cost money, and he tells how he would pay for it. BAM! They slam him for that!
Obama proposes a universal health care program, coupled with a net tax cut, with apparently it, the deficit and everything else to be covered by cutting "wasteful and unnecessary programs" like
"payments for high-income farmers" (Good luck with that ... but isn't Obama a big supporter of ethanol subsidies?)
There's no tax increase paying for things to attack like they attacked, no political liability, universal health care is sold as free ... but is this really a "new" kind of politics?
It's funny how economists like these during the election season start writing op-eds that could have been written by trial lawyers in the middle of a case.
Politics of fiscal responsibility
Fiscal responsibility is a loser at the polls. Fiscal responsibility requires either cuts to popular programs or raising more revenue.
A candidate who promotes either of these will lose.
The budget does not occur in a vacuum. Congress has some power to modify a president's proposal. McCains wildly irresponsible fiscal policy might not be so bad because a Democratic Congress is unlikely to extend Bush tax cuts. Would McCain use a veto to force of budget showdown? If he did not would wealthy special interests clobber him for raising their taxes? It might not matter because McCain is too old currently to run for president. He would be way too old to run for re-election 4 years from now.
ObamaCare is a light weight proposal compared to the more robust HillaryCare. There are costs to extending health care to the uninsured, but we are already paying most of those costs elsewhere in the system. However, Obama is also for increasing the size of the military which IMHO is a waste of our tax dollars. So yes, something has to give, especially if Congress keeps Paygo.