Some responsible lawmaking at long last: a war tax

It seems as though Congressman Dave Obey's proposal to levy a tax to help pay for the Afghanistan war is serious. Via Yglesias:

The details of the proposal:

Dubbed the “Share the Sacrifice Act,” the six-page bill exempts anyone who has served in Iraq or Afghanistan since the 2001 terrorist attacks as well as families who have lost an immediate relative in the fighting. But middle-class households earning between $30,000 and $150,000 would be asked to pay 1% on top of their tax liability today — a more sweeping approach than many Democrats have been willing to embrace.

I love this idea. It's always bothered me that while we engaged in an elective war in Iraq, Congress was cutting taxes and Bush was keeping cameras away from soldiers' caskets. The American public was shielded from the costs of the war, precluding any reasonable weighing of costs and benefits from taking place. A tax like this would at the very least make the financial costs of the war salient for everybody.

I'd really like to see a Republican--or a Blue Dog Democrat--argue against this one. Especially after all this supposed concern they've been expressing about the deficit.

A conservative gets real

Via Ezra Klein, a pretty good interview with Bruce Bartlett who has the too-rare distinction of being an intellectually honest and perfectly reasonable conservative. Here he is on the benefits of a VAT (value added tax):

I think the administration made a mistake approaching the funding of health-care reform how it did and I think Republicans made a mistake refusing to seriously debate the issue or its funding.

The value-added tax would be a very appropriate tax to use for this purpose. One reason is I am disturbed that we have a large percentage of the population that pay no income taxes. And I know many of those people pay payroll taxes. But income taxes fund the general government. According to a study by the Tax Policy Center, 47 percent pay no income tax, or have negative liability. And I think it's bad for democracy when people get into the position when a majority can vote benefits for themselves but not pay for it. And that should disturb liberals as much as conservatives.

The VAT would necessarily be a broad-based tax. It would be a way of getting people to pay for the benefits they themselves receive. People like Len Burman and Rahm Emmanuel's brother [Ezekiel Emmanuel, a health care adviser to Peter Orszag] have supported this for some time. Len argues that if people knew the VAT was dedicated to health-care reform, and the rate rose and fell automatically with the spending of the system, they would have an incentive to hold down taxes. They would have some positive reinforcement we do not now have with Medicare. I hope that's right. You know, every other major developed country has a VAT: The parties of the left in Europe made a deal a long time ago: If conservatives will let us have a welfare state, we'll fund it conservatively. And I think that's still a good deal.

He also makes a good point about how a VAT would give the government an additional tool to stimulate spending in a recession:

And thinking about this from another perspective, suppose we had a VAT right now and we wanted to stimulated consumption. Reducing the VAT rate temporarily would be a wonderful way to stimulate consumption. Suppose you had a 10 percent VAT and we said we weren't going to collect it for the next 10 months. People would buy like crazy. They'd buy toilet paper, they'd buy anything they could get their hands on that they knew they'd need in the future. We're depriving ourselves of a great stimulant tool by ignoring this.

I think I agree with a lot of this. Even if a VAT is regressive, realistically it's the only way you're going to get conservatives on board with funding a welfare state--and it's nice that it has other benefits too, like its ability to work as a stimulus tool, and the fact that it would properly align incentives with regard to keeping the costs of healthcare in check.

Moreover, just generally speaking, I think lots of people agree that at some point we're going to have to shift to a less demand-oriented economy (currently consumer spending accounts for 70% of GDP), so it makes sense to shift the tax burden away from income and more towards consumption.

On a separate point, I think this interview really brings into stark relief how damaging it is for the country that there is no intellectually honest opposition party that offers serious policy alternatives. I understand that conservatives don't want an expanded welfare state and that they view the obstruction of its expansion as a worthy cause, but at some point this behavior takes its toll on the ability of the government to operate: if you relentlessly increase spending while refusing to raise revenue in the long term, the federal government will eventually just stop working (see: California). That's an outcome nobody should want, regardless of ideology.

Obama having it both ways with tax rates

I just got done watching (the rather dull) Obama news conference, and something caught my attention about Obama's position on the tax deduction for charitable giving:

And what we've said is: Let's go back to the rate that existed under Ronald Reagan. People are still going to be able to make charitable contributions. It just means, if you give $100 and you're in this tax bracket, at a certain point, instead of being able to write off 36 percent or 39 percent, you're writing off 28 percent.

...

And so this provision would affect about 1 percent of the American people. They would still get deductions. It's just that they wouldn't be able to write off 39 percent.

In that sense, what it would do is it would equalize -- when I give $100, I'd get the same amount of deduction as when some -- a bus driver who's making $50,000 a year, or $40,000 a year, gives that same $100. Right now, he gets 28 percent -- he gets to write off 28 percent. I get to write off 39 percent. I don't think that's fair.

So Obama seems to be arguing for tax deductions to be "flat"--for a person making $50,000 a year to receive the same percentage deduction on charitable giving as a person making $500,000. But this is just the converse of the flat tax! The same logic that argues for a progressive tax structure on the disincentive side also argues, conversely, for a regressive tax structure on the incentive side. In other words: if we can tax Bill Gates a higher rate because giving up 39% feels way less painful to him than it does to me, then we must also incentivize Bill Gates at a comesurately higher rate, because his gaining 28% feels way less pleasurable to him than it does to me.

(Related post here.)

All of civilization is riding on a <5% difference in the top marginal tax rate

I guess it's not wise to take these things too seriously, but honestly:

“People are starting to feel like we’re living through the scenario that happened in ‘Atlas Shrugged,’” said Campbell. “The achievers, the people who create all the things that benefit rest of us, are going on strike. I’m seeing, at a small level, a kind of protest from the people who create jobs, the people who create wealth, who are pulling back from their ambitions because they see how they’ll be punished for them.”

In Rand’s novel, creative people (the “Atlases” of the title) are hounded and punished for their labor by an oppressive, socialistic state. In response, they retreat from society to a hidden enclave where they watch civilization’s slow collapse.

Look: Obama isn't seizing haciendas and turning them over to The People. He's increasing the top marginal tax rate from 35% to 39.5%. He's increasing the capital gains tax from 15% to 20-28%. As for the top marginal tax rate, it is still very low by historical standards:

I mean, if this is end-of-the-world socialism, then what do you call 1960, when the top marginal tax rate was 90%?

Estimating your tax burden

Via Ezra Klein, a tool that estimates the change in your tax burden under Obama's plan as well as McCain's plan. Of course, all this is based on what each candidate is proposing; what will actually come out of Congress is likely to be a lot different (especially in light of the $700,000,000,000 bailout package that is in the works).

Best tax chart yet

Via Sullivan, this awesome chart from Chartjunk that takes into account the number of people in each bracket:


The thing that surprises me the most is how much greater in magnitude the tax cuts are for the bottom 60% in Obama's plan. In the McCain plan, they are hardly tax cuts at all.

Why we say, "the GOP is out of ideas"

The following chart shows the top US marginal income tax rate from 1913 to 2003:




In 1980, when Reagan was elected, every dollar you earned past $215,400 was taxed at a rate of 50% (70% for unearned income). After the tax revolt of the 80s, that rate was drastically reduced: to 28% at its lowest point. In the Clinton years that rose back up to 39.6% for dollars earned past $250,000 or so.

Under George W. Bush, that rate was reduced to 35%, where it remains through today. Under Obama, the top rate would move back up to where it was under Clinton: about 40%.*

From the way that Republicans have been pounding their fists and shouting to the rafters, you would think that Obama was proposing a top income tax rate increase of epic proportions. In reality, he is proposing an increase of 5%. That's right: a difference of a nickel of every dollar earned after about $300,000. And the top rate would still remain low overall by historical standards--well under the >50% seen in most of the 20th century.

But what about capital gains (i.e., money earned from investments rather than a paycheck)? The current rate is the lowest it has been since 1933: 15%. Obama would raise that to somewhere in the neighborhood of 25%, which is about where it was in the Clinton years and somewhat higher than it was during much of the 80s. So let's put that increase at 10%.

The final tally, then: the top income tax rate increased by 5%, and the capital gains tax increased by 10%--both levels raised to what they were during the prosperous Clinton years.

The Republicans carry on as if the tax revolt of the 1980s never happened--as though the wealthiest Americans--the investors, the entrepreneurs--were still forfeiting over half of their post-$200,000 income to Uncle Sam. But they are fighting a battle that Reagan already won, and that the Democrats already conceded. There is not one serious politician left who advocates that we return to the pre-Reagan tax rates. And yet still, impossibly, bloody-mindedly, the Republicans insist on more tax cuts--despite dramatically increased federal spending (on both entitlements and two concurrent wars), and despite ballooning deficits. And they continue to depict Democrats as if they were advocating the absurdly high marginal rates of the Great Society years.

We cannot, as the backwards saying goes, have our cake and eat it too. To acknowledge the necessity for a modern infrastructure, a quality education system, a functional healthcare scheme, and a superior military is to acknowledge the necessity of a tax rate that is high enough to cover these tremendous costs. Perhaps there was a time when we could believe that the Republicans would offset their tax cuts with reductions in federal spending, but George W. Bush and his agenda of big government conservatism--and his pet war, Iraq--put that idea to rest.

I've noticed lately that I've been describing the Democrats as "adults" and Republicans as "children". No where is this more true than in fiscal policy. While the Republicans shout gleeful impossibilities in between schoolyard taunts--"Obama is a celebrity! I'll pay for $1000 billion worth of tax cuts by cutting $72 billion in earmarks!** Obama eats arugula!"--the Democrats reasonably suggest, as a starting point, that we return to a tax rate scheme that has been shown to work in the past. It is almost as if the Republicans themselves don't really believe that they'll be in power, and that all they have left is the grim catharsis of pretending to be Ronald Reagan in front of an audience of their peers.


*Hm..but is this quite right? According to one blogger, the de facto rate could be higher: "Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent." If true, this argues against my point--however, it is unclear from this post whether the additional nickel and diming would affect a large number of wealthy people or a relative few, or what. Also, it would be unfair to factor in these hidden costs of Obama's plan without also factoring them into the historical tax rates that form the baseline we are comparing against. So I think the most reasonable thing to do is ignore the de facto tax rates for now, and look naively at the explicit tax rates to give us a general idea of where Obama's plan stands historically.

**"Permanently extending the tax cuts would reduce tax revenue by $1 trillion over four years. If Mr. McCain eliminated every earmark (including money for the gas pipeline that Ms. Palin wants to build in Alaska), the savings would total about $18 billion a year. He hasn’t offered any idea of where he’ll get the rest of the money." (NYT editorial)

Actual information

A report on the candidates' tax plans by the nonpartisan Tax Policy Center has been making the rounds today (via Paul Krugman's blog). Some highlights:

1. Both McCain and Obama would greatly increase the national debt, although McCain's plan would increase it by roughly 40% more than Obama's:
   

   ...without substantial cuts in government spending, both plans would sharply increase the national debt. Including interest costs, Obama would boost the debt by $3.5 trillion. McCain would increase the debt by $5 trillion.

2. Lower/middle income families would see their after-tax incomes rise under both plans:
   

   [Obama plan:] By 2012, middle-income taxpayers would see their after-tax income rise by about 5 percent, or nearly $2,200 annually.
   [...]
   McCain would lift after-tax incomes an average of about 3 percent, or $1,400 annually, for middle-income taxpayers by 2012.

3. Those in the top 1% will experience lower after-tax incomes under Obama's plan, but significantly higher after-tax incomes under McCain's plan:
   

   [Obama plan:] Those in the top 1 percent would face a $19,000, or 1.5 percent, reduction in after-tax income.
   [...]
   But, in sharp contrast to Obama, [McCain] would cut taxes for those in the top 1% by more than $125,000, raising their after-tax income an average 9.5 percent.
   
   

4. Significantly more people will have health insurance under Obama's plan than McCain's plan, but neither plan offers universal coverage:
   

   TPC projects the McCain plan would trim the uninsured by 1 million in 2009 and nearly 5 million by 2013, although their numbers would slowly rise thereafter because the tax credit would fail to keep pace with premiums. Obama would reduce the uninsured by 18 million in 2009 and 34 million by 2018. Even under the Obama plan, however, 34 million Americans would still lack insurance in 2018.
   

   
   

Re: Flat tax

An email I sent to the Sullivan blog with regards to the flat tax issue. I don't know if anyone will ever read it, but whatevs.

Hi Andrew,

You write that you want government to raise money "as equally as possible", and that you disagree with the idea that "tax policy should really be about redistributing wealth, and engineering substantive economic outcomes." This is all well and good. However, it is not clear to me that nominal equality in the tax code--i.e., everyone being taxed by the same numerical percentage--necessarily translates to the sort of "equality" that you are interested in. Certainly, if minimizing the impact of taxation on society is your goal, you will favor a scheme that imposes as few burdens as possible on society, and imposes them as equally as possible across all members, thereby making the government's presence in our lives as neutral as possible vis-a-vis our situation in life--our level of wealth, our ambitions, etc.. But to speak of a burden is to speak of a subjective state of the individual, a felt cost. Because a flat tax ignores the fact of diminishing returns on income--the fact that my 100,000th dollar earned means less to me, is worth less to me than my 1,000th dollar earned--it thereby imposes a very uneven burden on society, causing there to be a proportionately greater felt cost to the less wealthy.

So the question is: what is the more meaningful interpretation of "equal taxation"? Does it mean taxation that, while nominally equal for everyone, imposes a far greater burden (as subjectively evaluated by the individual) on the less wealthy? Or does it mean taxation that, while not nominally equal for everyone, makes some attempt to equalize the felt cost of taxation across all members of society?

Flat tax

Andrew Sullivan recently mentioned in an offhand way that he favors a flat tax, which I suppose triggered a big reaction, because he has followed it up with a longer post defending his position. He says:

So yes: a flat tax so far as possible for as many as possible and no deductions. That's my goal. How that differentially impacts the lives of citizens should not be government's primary concern.

Government's primary concern is to raise money as efficiently and as leanly and as equally as possible. I'm happy with the government then setting up programs to assist the poor, to provide better education for those at the bottom, safety-net healthcare and better policing. i.e. to gear spending toward social ends that might help the poor the most. These are measurable, practical goods. What I'm not happy with is the assumption that tax policy should really be about redistributing wealth, and engineering substantive economic outcomes. Yes, of course, at lower income levels, a 20 percent flat income tax will be more onerous proportionally than at higher incomes. So what? Why should that even concern a government that is not aiming to socially engineer more substantive equality? and the alternative - skewing taxes to target success - is an absurd set of incentives to put into a growing society.

So Sullivan wants the government to raise money "as equally as possible", and does not want the government to redistribute wealth. But why does a flat tax accomplish this any more than a progressive tax? The law of diminishing returns states that the 100,oooth dollar you earn is less valuable to you than the 10,000th dollar you earn, and that the 10,000th dollar you earn is less valuable to you than the 1,oooth. Given this, it makes sense that the government should tax at the lowest rates for the first dollars you earn and gradually raise that rate for successive dollars earned. Since the same progressive rate is applied to everyone, money is raised "as equally as possible".

Yes, of course, at higher income levels, a progressive tax structure will be nominally higher than at lower incomes. So what? Why should that even concern a government that is not aiming to socially engineer more substantive equality? And the alternative - skewing taxes to target poverty - is an absurd set of arbitrary penalties to put into a fair society.

Re: Gas Tax Holiday

Via Yglesias, it looks like at least one reporter is actually calling bullshit on the "gas tax holiday":

Gas tax holiday

The best, tightest explanation I've seen about why McCain's--and now Clinton's--proposed "gas tax holiday" doesn't make any sense is at Krugman's blog:

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.

Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving.

So the actual price of gasoline this summer is going to be what it's going to be, whether a portion of that price is paid to the government (in the form of a tax) or not. Eliminate a tax of 5%, and the price will rise 5%.

If you actually wanted to save the consumer money--which is what McCain and Clinton cynically claim the "gas tax holiday" will accomplish--you would have to introduce price controls. That is, you would have to have the government enforce some kind of maximum above which the price of gasoline could not rise. But of course, this wouldn't really work: though you'd save the consumer money, you'd also cause gas shortages that would hinder the consumer from getting gas at all.

At the end of the day, the price of gasoline is being driven up by scarcity--world demand is increasing significantly faster than world supply. No legislative gimmickry or tax holidays are going to change that basic fact.

Obama, at least, has had the backbone to speak this truth to the American people.