Obama Tax Plan

The good news about yesterday's Barack Obama speech on tax policy is that it's a good speech. The basic theme of the speech is that the tax code should be made simpler, fairer, and more progressive. I agree! Unfortunately, the policy followthrough is a little lacking:

• Cutting taxes for 150 million Americans and their families, allowing them to get a tax cut of up to $1000.
• Easing the burden on the middle class by providing a universal homeowner’s tax credit to those who do not itemize their deductions, immediately benefiting 10 million homeowners, the majority of whom make under $50,000 per year.
• Eliminating the income tax for any American senior making less than $50,000 per year, eliminating income taxes for about 7 million American seniors.
• Simplifying tax filings so millions of Americans can do their taxes in less than 5 minutes.

Andrew doesn't like that last part, under which "The IRS would send prefilled tax forms to 40 million workers who take the standard deduction and have a bank account." That, though, is a perfectly good idea that, though not original to Obama, he is just now injecting into the present campaign.

The homeowner's tax credit idea is directed at a real problem -- the bad distributive effects of our current tax treatment of homeownership -- but addresses it from the wrong side. Having the tax code show favoritism toward homeownership over other kinds of investing makes no real sense. Eliminating the favoritism isn't feasible, but a good incremental step to making it more progressive would be to limit the favoritism more at the top, and give people near the bottom either some other form of tax relief or else more services.

Having seniors who make less than $50k pay no income tax just seems to totally lack rationale.

The first plank, which would be a new kind of refundable tax credit, has a worthy impulse but seems poorly designed. The tax credit situation is already very complicated. The right thing to be doing is streamlining it, as in the EPI's proposal for a SImplified Family Credit, not further complicating it with an additional credit.

Comments

Also, if I understand correctly, Obama is double-dipping the same money to pay for the tax cut that he did for his healthcare plan.

Posted by Petey | September 19, 2007 9:43 AM

"Andrew doesn't like that last part, under which "The IRS would send prefilled tax forms to 40 million workers who take the standard deduction and have a bank account." That, though, is a perfectly good idea that, though not original to Obama, he is just now injecting into the present campaign."

Andrew is wrong here, of course.

Edwards proposed as similar tax filing simplification plan earlier in the campaign, and it's generally a very good idea for Dems to be pushing.

Reducing the hassle of the IRS, especially for taxpayers at the median and below, is important for pushing a politically successful progressive agenda.

Posted by Petey | September 19, 2007 9:47 AM

Rather then add yet more tax loopholes to the tax laws, I suggest that the original 1996 proposal by then presidential candidate Steve Forbes be brought back with modifications as appropriate. This proposal was for a flat tax with no deductions but with high exemptions. The original proposal was for a 20% flat tax with an exemption of $7500 for each dependent. Under this proposal, a family of 4 with an income of $30,000 would pay no tax. A family of 4 with an income of $60,000 would pay a tax of $6,000. Obviously, these numbers have to be refined as there has been inflation since 1996.

Posted by SLC | September 19, 2007 9:50 AM

"Having seniors who make less than $50k pay no income tax just seems to totally lack rationale."

Rationale? The AARP has the American political system's balls in a vice

Stupid old people and their "voting"

Posted by Jack | September 19, 2007 9:55 AM

"I suggest that the original 1996 proposal by then presidential candidate Steve Forbes be brought back"

You suggest that because you have an IQ of about 70, SLC.

Thank god Jon Chait bothered to write a book refuting "ideas" like yours.

Posted by Petey | September 19, 2007 9:56 AM

Re Petey

How about providing some comments on what Mr. Petey thinks is wrong with the flat tax/high exemption proposal. Making ad hominem personal attacks doesn't cut it.

Posted by SLC | September 19, 2007 10:06 AM

No surprise SLC likes the "Steve Forbes Should Never Have to Pay Taxes!" plan. Yes, a plan that completely keeps capital income from being taxed is a great idea.

Posted by Rob | September 19, 2007 10:08 AM

A family of 4 with an income of $60,000 would pay a tax of $6,000.

We're talking income taxes, of course. That family of 4 already takes advantage of 2 child tax credits and the standard deduction.

According to the 2007 Federal Income Tax Estimator, their estimated tax liability is $3,593 -- and that's if they didn't put any money into tax-deferred retirement accounts.

Posted by Tyro | September 19, 2007 10:10 AM

"Making ad hominem personal attacks doesn't cut it."

Generally, I think this is correct, but you are an exception to the rule, SLC.

-----

If you'd like to address Matthew's post about the Obama tax plan rather than going off-topic on your own idiotic tangent, you'd be more worthy of an actual response.

Posted by Petey | September 19, 2007 10:12 AM

Actually, the big problem with our tax system is its inefficiency, excessive use of intermediaries,
and lack of transparency.

I therefore propose an online trading system --similar to the stock exchange -- under which politicans could buy votes and sell favors.

Every citizen ..er ..stockholder would get 1 share in USA Inc which he could either sell or bundle with other investors to make larger investments. Corporations could buy indulgences ..er..well-crafted economic proposals and such favors could be traded as well.

The only thing I haven't figured out is how to regulate the system so that politicans don't sell more favors than they can do -- and don't sell the same favor to two different parties (or , as they say on K Street, "doesn't stay bought")

Posted by Don Williams | September 19, 2007 10:14 AM

I know SLC said that this would have to be "updated" to make up for 10 years of inflation, but the point is that we already have a de-facto high deductible for a typical family of 4, resulting in a very low tax liability for them. The net effect of these Forbesian flat-tax ideas is that the middle classes pay about the same while those on the upper end of the income spectrum pay much, much less.

The best tax reform we can make is similar to Obama's-- automatically file and refund taxes for the wide swatch of people whose taxes are pretty straightforward.

Posted by Tyro | September 19, 2007 10:17 AM

Don't seniors who make under $50,000 already pay no income tax? Or at least very little?

Posted by Nicholas Beaudrot | September 19, 2007 10:24 AM

I think senior citizens should all get gold plated thrones to sit on too and be able to commandeer any non-seniors and be able to ride the rest of us like a horse anytime they want. They should not have to pay taxes, they should get all their drugs for free and they should get to require that all of us turn down our loud rock music and stay off their lawn.

Posted by Jayhawk Max | September 19, 2007 10:31 AM

Actually, the home-owner thing is a hold-over from the time when all interest was deductible.

I think the rationale/rationalization for encouraging home investment over other sorts of investment is that home-owners are thought to have a greater investment in their communities, and therefore will show greater involvement in local affairs. I suppose it's a dim echo of the attitude that led to giving the vote only to property-holders. Don't know why second homes remain deductible, though.

Posted by dm | September 19, 2007 10:36 AM

Reducing the hassle of the IRS, especially for taxpayers at the median and below, is important for pushing a politically successful progressive agenda.

I feel like every politician promises this sort of thing every 4 years and it just never happens.

Posted by Steve | September 19, 2007 10:51 AM

"I feel like every politician promises this sort of thing every 4 years and it just never happens."

I don't believe either party has previously run on the kind of proposal Edwards introduced this past spring and Obama has now latched onto.

Posted by Petey | September 19, 2007 10:56 AM

Re Dm's comment "I think the rationale/rationalization for encouraging home investment over other sorts of investment is that home-owners are thought to have a greater investment in their communities, and therefore will show greater involvement in local affairs"
-------------
Actually, it serves several purposes:
a) Cuts down on the mobility of labor by raising large switching costs. A worker with a 20 year mortage to pay on a house in which he has sunk most of his life savings is a lot more docile than a renter. Even if he gets shafted at work, He can't move to another company in another city without paying a large sum to a real estate agent to unload his house.

Corporate America likes docile.

b) It is one of the primary channels by which the Federal Reserve manipulates the US economy.

In a recession, the Fed cuts interest rates in order to encourage consumers to invest their money into housing.

That encourages activity in the housing sector and related suppliers ( Home Depot, real estate, transportation, etc) which hires workers who spend their paychecks on other industries (Auto,sports bars etc.)

The consumer sector of GDP is much larger than the Government Spending sector or the Business Investment (building factories,etc) sector. Plus , encouraging Government spending (fiscal policy) usually just pisses away a lot of money.

Posted by Don Williams | September 19, 2007 10:56 AM

Matt's talked about the supposed preferred treatment of home owning over other investments before, of course, he is ignoring property taxes, which for most homeowners more than offset their income tax deductions. Since other investments have no paraellel tax to property taxes, the overall tax effect is on "investing" is probably pretty neutral.

One could make the argument that there is a skewing of ownership vs renting, but renters receive the economic incidence benefit of their landlord's depreciation allowance.

Posted by AJ | September 19, 2007 10:56 AM

No frigging way.

I agree with Mark Schmitt that progressives really need to combat taxophobia, desperately need to gain funds for social spending and infrastructure inprovements.

Now if a candidate doesn't want to run openly on tax increases, fine, but no Democrat ever ever ever should talk about tax cuts. Do them in combination with redistribution, but never contribute to some Laffer frame. America is bankrupt, and approaching default. Jesus.

Unless they are all Republicans.

Posted by bob mcmanus | September 19, 2007 11:00 AM

I don't believe either party has previously run on the kind of proposal Edwards introduced this past spring and Obama has now latched onto.

Maybe it's not the exact same proposal, but I'm just saying I hear this sort of rhetoric about tax simplification from everyone. I award no points for talking about it, because everybody talks about it.

Posted by Steve | September 19, 2007 11:31 AM

"I'm just saying I hear this sort of rhetoric about tax simplification from everyone"

You may hear or feel anything you like, Steve, but to the best of knowledge, neither party has run on anything even remotely like this proposal in the past.

Prior to Edwards raising the issue this past spring, nothing even remotely like this has not been part of the mainstream political discourse.

Posted by Petey | September 19, 2007 11:37 AM

"I'm just saying I hear this sort of rhetoric about tax simplification from everyone"

If you actually need the appropriate elaboration:

Certain segments of Republicans have long been advocating a simplified tax structure, since properly constructed, it would greatly benefit the very high income folks they cater to.

But that's a deeply different idea than the Edwards proposal for a simplified filing system for medium and low income earners.

Posted by Petey | September 19, 2007 11:46 AM

Actually, to my knowledge this particular idea for simplified filing originated with Austan Goolsbee, a professor at the University of Chicago Graduate School of Business who is now one of Obama's economic advisors. He wrote a paper on the subject for Brookings which was published in July of 2006. He also wrote a related op-ed for the NYT which was published on 4/7/06.

But the basic idea is much older than that--as Goolsbee pointed out at the time, California had recently run a test of such a program, a version was studied by the GAO in 1996, and versions are in effect in Denmark and Sweden. So, I don't think any candidate today can claim ownership of the idea.

Posted by DTM | September 19, 2007 11:53 AM

"So, I don't think any candidate today can claim ownership of the idea."

Indeed. As with most good progressive policy coming forward this election cycle, Edwards proposed it first.

But since most of what Edwards is proposing will end up as the official Democratic Party position, it belongs to all of us.

Posted by Petey | September 19, 2007 11:58 AM

Again, though, it was Goolsbee who actually proposed this particular plan first, including in the decidedly mainstream venue of the NYT. In fact, I believe Edwards even referred to Goolsbee, which he would have to do since I believe tax folks would instantly have recognized it as Goolsbee's proposal.

Not that it really matters, but if we are giving credit, we should give it where it is due.

Posted by DTM | September 19, 2007 12:08 PM

Actually, Petey, those of us who don't follow politics or policy through the myopic lense of "did Edwards propose this, and if so, when?", know that Austen Goolsbee proposed this long before Edwards did, in July of 2006. In case you weren't aware, Goolsbee is also main economic adviser. So maybe...just maybe, this has less to do with Edwards "leading" on an issue and more to do with Obama listening to his advisers and proposing a policy in line with them. Not every candidate has the luxury of spending 6 years now running for the nomination, so Edwards early releases are less a function of leadership and more of politics than, I think, his supporters willing to admit.

Indeed, it's a little bit masturbatory, at this point, the way Edwards' supporters want his candidate to get credit for basically anything good any candidate says.

Posted by mopper | September 19, 2007 12:16 PM

"Again, though, it was Goolsbee who actually proposed this particular plan first"

Sure.

But the lifecycle of a policy proposal includes first the policy person who first espouses it, and it includes the politician who first brings it into the fray.

Supply-side voodoo economics progresses from Laffer to Wanniski to the conservative idea mill to Reagan to the rest of the Republican Party. So one would be equally correct to say that credit devolves to Wanniski or that credit devolves to Reagan.

And in this case, we could validly credit the Danes, Swedes, and Californians, we could credit Goolsbee, or we could credit Edwards. Since I'm an electoral politics kind of guy, I tend to credit Edwards.

Posted by Petey | September 19, 2007 12:16 PM

But the lifecycle of a policy proposal includes first the policy person who first espouses it, and it includes the politician who first brings it into the fray.

What about the politician who makes that policy person his main economic adviser and makes that proposal a centerpiece of his policy?

Please. Get off it.

Posted by mopper | September 19, 2007 12:24 PM

"Not every candidate has the luxury of spending 6 years now running for the nomination, so Edwards early releases are less a function of leadership and more of politics than, I think, his supporters willing to admit."

I think it's rather clear to most observers that both Clinton and Obama were signaling their intentions to run as proud centrists last spring, and that Edwards' progressive policy agenda has put pressure on both of them to alter their message.

Whatever motivations you want to ascribe to this dynamic, I think Edwards' stance of identifying good and populist progressive policy and aggressively standing behind it has been beneficial for the entire Democratic field, and will beneficial for the entire Party in the future.

Posted by Petey | September 19, 2007 12:30 PM

Regardless of what overall impact Edwards has had on the discourse among the Democratic contenders, I think in this particular case, it seems pretty likely that Obama would have independently gotten the idea from Goolsbee. So while I am fine with giving Edwards credit for also recognizing a good idea when he sees it, I think it makes little sense to credit him with giving the idea to Obama by adopting it in a public proposal.

Similarly, while I have no special insight into whether Obama would have proposed this idea even if Edwards had not, that also strikes me as pretty likely, given the Goolsbee connection. Indeed, I am not at all sure how this fits into some centrist-progressive storyline. Rather, this just seems like an independently good idea, and one which many people could support for largely nonideological reasons (except perhaps major stockholders in H&R Block or Intuit).

Posted by DTM | September 19, 2007 12:51 PM

If seriously considered how would any change to the tax structure actually happen? Is it a bill..a law...hostages? Would there be lots of lobbying for and against?

Posted by judson | September 19, 2007 12:55 PM

"Similarly, while I have no special insight into whether Obama would have proposed this idea even if Edwards had not, that also strikes me as pretty likely, given the Goolsbee connection."

Sure.

"Indeed, I am not at all sure how this fits into some centrist-progressive storyline. Rather, this just seems like an independently good idea, and one which many people could support for largely nonideological reasons "

While I get your point here, I'd make two quibbles:

- I'm not sure Republicans would be all that happy about this proposal, since they envision using popular revulsion against the IRS and the tax code as an excuse to re-jigger the tax structure in less progressive directions. If I were Grover Norquist, I'd see a proposal like this as a minor disaster for my cause.

- It's definitely not a traditionally "left" idea. But smart populist progressive politics depends on measures like this. Make the electorate less hostile to the tax system, and you reduce the political saliency of Norquist-ism.

Posted by Petey | September 19, 2007 12:59 PM

Are ANY of the Republican candidates giving policy speeches? I don't read as many conservative blogs nor as frequently as I do progressive/liberal ones, but I've seen zero mentions of policy speeches on the Repub side and there's a flurry of them on the Dem side lately. I understand it's early in the season to start bashing the other side, but seems a generic ad blitz along the lines "our side actually has ideas" might be in order soon.

Posted by Fred F. | September 19, 2007 1:14 PM

The way we promote home ownership as a form of investment leads directly to McMansions and suburban sprawl-- and, thus, indirectly, plays a role in our energy issues. Our whole urban architecture is screwed up because we rig the game against living in denser communities. This is deeply pernicious.

Posted by Anthony Damiani | September 19, 2007 1:47 PM

Anthony Damiani- It's not the tax system that distorts American's consumption of real estate. It's transportation policy, as anyone in San Fran, New York or Boston can tell you, high density does not equal cheap.

Posted by AJ | September 19, 2007 2:09 PM

The ridiculous subsidies this country gives to homeowners are just as bad as those given to farmers. We need to stop these stupid practices which only lead to inefficiency and things like the current housing/subprime problems.

Owning a house is a privilege, not a right.

Posted by Andy | September 19, 2007 2:42 PM

I don't necessarily agree with a plan to eliminate income tax for seniors earning under $50k a year, but it definitely does not "lack rationale". The rationale is clear: the degree of deadweight loss from income tax varies significantly based on the type of worker. Traditional supporters of families - for instance, middle-aged men - are much less likely to stop working or work less because of income tax. Married women who have the option of being housewives are highly sensitive to changes in income and so income tax can simply push them out of the labor market if they don't see it being worth their while. This is bad for tax revenue, not to mention the economy.

I haven't read any studies on seniors in particular, but I can venture a guess based on this data: seniors are probably one of the groups most likely to stop working if they expect low after-tax income. Many seniors have the option of retiring, into a sometimes semi-impoverished but nonetheless leisurely life, and they would logically be extremely sensitive to income tax when they decide whether or not to continue working.

While increasing income tax for married men and decreasing it for married women would no doubt be politically impossible, not to mention obviously unfair, eliminating income tax for working-class seniors is politically possible and would have a similar positive effect. I may not agree with it, but it is not unsound reasoning.

Posted by Andrew G | September 19, 2007 2:55 PM

"I haven't read any studies on seniors in particular, but I can venture a guess based on this data: seniors are probably one of the groups most likely to stop working if they expect low after-tax income."

Well, considering the small amount of federal income tax a senior earning, say, $35,000 would have to pay, I think this is a somewhat absurd argument.

No one is going to stop working because the feds are taking 8% or so off the top.

Posted by Petey | September 19, 2007 3:14 PM

No one is going to stop working because the feds are taking 8% or so off the top.

No one who needs to work to feed their family, sure. But if you have a choice between a very modest pension and no work, and a paycheck and a full week of work, marginal increases in income impact the decision making.

The actual income tax of a person earning $35,000 a year is around $4000. For $50,000 a year, it's around $7500. That is hardly a trivial amount of money.

Posted by Andrew G | September 19, 2007 3:52 PM

"The actual income tax of a person earning $35,000 a year is around $4000"

Well, no. The actual federal income tax of a person earning $35,000 who is married or a widow/er, which would cover the large bulk of senior citizens, would be under $3,000.

"That is hardly a trivial amount of money."

Again, if you think a tax rate of 8% is going to push folks out of the workforce in non-trivial numbers, no matter what their situation, you've got an odd concept of human motivations...

Posted by Petey | September 19, 2007 4:01 PM

Well, no. The actual federal income tax of a person earning $35,000 who is married or a widow/er, which would cover the large bulk of senior citizens, would be under $3,000.

Ah, I didn't realize that widowers would be taxed as married instead of single. My computations were for single seniors.

Again, if you think a tax rate of 8% is going to push folks out of the workforce in non-trivial numbers, no matter what their situation, you've got an odd concept of human motivations...

There is no need to discuss my concepts ad hominem. This is a basic concept of economics: incentives affect decisions, and marginal changes to incentives change the effect on decisions. If you had a choice between a job you liked a great deal, but that paid little, and a job you disliked but that paid a lot more, there are probably certain values for "little" and "lot more" at which you would take one job, and certain values for it at which you would take over.

Seniors, housewives, and other people who could probably get by without working are analogous to the above hypothetical. There is a certain amount of money for which they would choose to work, and there is a certain smaller amount of money for which they would choose not to work. This is elementary. The point that people like seniors are more sensitive to changes in income than traditionally breadwinning family men is more contentious, but still well demonstrated.

Posted by Andrew G | September 19, 2007 4:36 PM

Re Rob

I would not agree with that part of the Forbes proposal to eliminate the tax on capital gains. Thus, Mr. Forbes would not be able to avoid taxes since capital gains would still be taxed. In fact, he would probably have to pay more in taxes because all the loopholes that he and wealthy people now use to avoid taxes would be eliminated.

Re tyro

As I said, the proposal has to be updated to reflect 11 years of inflation and tax changes which have taken place in the interim. Thus, for example, raise the exemption to 10,000 with a 18% flat tax. Then a family of 4 with a $40,000 income would pay no taxes and a family of 4 with a $60,000 income would pay $3600. Clearly, in order to raise the same amount of money, if some people pay less then they do now, others will pay more.

Re petey

I think that my comment addresses the general theme of this thread which is what should be done with the tax code. If Mr. petey doesn't like it he can stick it where the sun don't shine.

Posted by SLC | September 19, 2007 7:01 PM

Re: The actual income tax of a person earning $35,000 a year is around $4000.

Which means that quitting work costs $31,000. So the logical thing to do is to continue working and "lose" $4,000 instead of losing $31,000. Of course there are some people for whom $31,000 is chump change, but they comprise a very small fraction of the population. The average person will go for the $31,000.

Posted by Jonf | September 19, 2007 9:07 PM

To Nicholas Beadrout and Jayhawk Max -
"Don't seniors who make under $50,000 already pay no income tax? Or at least very little?"
AND
"I think senior citizens should all get gold plated thrones to sit on too and be able to commandeer any non-seniors and be able to ride the rest of us like a horse anytime they want. They should not have to pay taxes, they should get all their drugs for free and they should get to require that all of us turn down our loud rock music and stay off their lawn."
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Nicholas, you are misinformed. My husband and I are senior citizens and are under the $50K ceiling and I assure you, we pay a LARGE amount for taxes.

Jayhawk Max, are you old enough to hold a real job yet? Your angry and sarcastic tone isn't impressive. We pay high taxes, get NO free drugs and I'm assuming you're talking about prescription drugs, and I love ROCK MUSIC! Wear your name I.D. on your shirt when you come in my yard and I'll throw your ass to the curb. I'm very pleasant to others who come in my yard.

Posted by NC | September 20, 2007 3:57 PM