October 17, 2008
POLITICS: Obamises, Obamises: Are His Tax And Spending Plans Real, or Not?
The media and the Obama campaign have repeatedly told us that the economy is the only issue in this campaign, and that Barack Obama's proposals, rather than his record, are the only way to judge him on the economy. If they mean it, they will demand that he clarify where he stands on the promises at the core of his tax and spending platforms.
(1) No Taxes Hikes of Any Kind Below $250,000
Obama has made three unambiguous-sounding "read my lips" style promises about taxes and spending in this race. One of these he left himself no room to back away from:
If you are a family making less than $250,000 a year, my plan will not raise your taxes. Period. Not income tax, not payroll tax, not capital gains tax, not any of your taxes. And chances are you will get a tax cut.
I suppose the Clintonian wiggle room there is the "my plan," present tense, and those of us who are familiar with the Democrats' M.O., who remember Bill Clinton throwing his middle class tax cut under the bus barely weeks after being elected, and who (as the McCain camp has pointed out relentlessly) saw Obama vote for a party-line budget resolution that would have extended tax hikes much lower down the income ladder know that Obama is highly unliklely to keep this promise. But it has, in fact, been stated with such clarity that if elected, Obama will properly be found to have lied to the American people if he breaks it by raising any tax of any kind paid by anyone with an income below $250,000. George H.W. Bush can tell you how that worked out.
(2) Tax Cuts For 95% of...Who?
Here is Obama in the second debate: "I want to provide a tax cut for 95 percent of Americans, 95 percent."
Is that 95% of current federal taxpayers? 95% of all households? 95% of all Americans, including children? Phil Klein of the American Spectator has tried to get the Obama campaign to clarify who this is 95% of and what the plan actually consists of (what rates, if any, will go down, for example), and can't get an answer (this in contrast to, say, the Bush tax cut plan in 2000, which was famously detailed).
The Wall Street Journal, of course, has noted that a lot of his "tax cuts" will actually involve the federal government cutting checks to people who currently pay no federal income taxes:
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.
The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year. The Heritage Foundation's Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.
The total annual expenditures on refundable "tax credits" would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center. This means that the tax-credit welfare state would soon cost four times actual cash welfare. By redefining such income payments as "tax credits," the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is.
The political left defends "refundability" on grounds that these payments help to offset the payroll tax. And that was at least plausible when the only major refundable credit was the earned-income tax credit. Taken together, however, these tax credit payments would exceed payroll levies for most low-income workers.
To any sane person, sending a check to someone who does not pay taxes is called "spending," not tax cuts - a policy of taxes and spending designed explicily for purposes not of financing the government's necessary operations but to "spread the wealth around," as Obama now-famously told Joe the Plumber, or "for purposes of fairness" as he told Charlie Gibson in the debate back in April.
Obama should be forced to come clean: 95% of who? Will he cut any tax rates, or just offer to cut a bunch of checks? If he won't clarify his promise, he can fairly be blamed for breaking another pledge if the percentage of current federal taxpayers whose tax liability doesn't go down under an Obama Administration ends up being, as most of us expect, vastly lower than 95%.
(3) Has Obama Abandoned His Promise of a Net Spending Cut? Where are the Loopholes?
Here's Obama in the second debate again:
[W]hat I've proposed, you'll hear Sen. McCain say, well, he's proposing a whole bunch of new spending, but actually I'm cutting more than I'm spending so that it will be a net spending cut.
Pretty unambiguous: he has promised the American people a net reduction in federal spending. Even if we assume that Obama (silently) excludes spending on existing entitlements from that calculation, it's another read-my-lips promise he can be held to, and that he is 100% certain to break if elected.
Now here is Obama in the third debate - watch carefully:
OBAMA: Well, first of all, I think it's important for the American public to understand that the $750 billion rescue package, if it's structured properly, and, as president, I will make sure it's structured properly, means that ultimately taxpayers get their money back, and that's important to understand.
But there is no doubt that we've been living beyond our means and we're going to have to make some adjustments.
Now, what I've done throughout this campaign is to propose a net spending cut. I haven't made a promise about...
SCHIEFFER: But you're going to have to cut some of these programs, certainly.
OBAMA: Absolutely. So let me get to that. What I want to emphasize, though, is that I have been a strong proponent of pay-as- you-go. Every dollar that I've proposed, I've proposed an additional cut so that it matches.
OBAMA: And some of the cuts, just to give you an example, we spend $15 billion a year on subsidies to insurance companies. It doesn't -- under the Medicare plan -- it doesn't help seniors get any better. It's not improving our health care system. It's just a giveaway.
We need to eliminate a whole host of programs that don't work. And I want to go through the federal budget line by line, page by page, programs that don't work, we should cut. Programs that we need, we should make them work better.
Now, what is true is that Senator McCain and I have a difference in terms of the need to invest in America and the American people. I mentioned health care earlier.
If we make investments now so that people have coverage, that we are preventing diseases, that will save on Medicare and Medicaid in the future.
If we invest in a serious energy policy, that will save in the amount of money we're borrowing from China to send to Saudi Arabia.
If we invest now in our young people and their ability to go to college, that will allow them to drive this economy into the 21st century.
But what is absolutely true is that, once we get through this economic crisis and some of the specific proposals to get us out of this slump, that we're not going to be able to go back to our profligate ways.
And we're going to have to embrace a culture and an ethic of responsibility, all of us, corporations, the federal government, and individuals out there who may be living beyond their means.
Some of Obama's blogospheric supporters on the far left, like Matt Stoller and Firedoglake, think that line about "once we get through this economic crisis and some of the specific proposals to get us out of this slump" means that he'll suspend his "pay as you go"/"net spending cut" promise for as long as he can say we are working to get out of a slump. On the Right, Soren Dayton and Jon Henke agree with Stoller's reading. (Ezra Klein noted in 2007 that Obama promised YearlyKos that he would not treat many of his new spending programs as subject to "PayGo" rules - he may be creating a loophole for himself by calling them "investment," although he revealed none of that in the debates.)
Me, I don't see it; I think a natural reading of Obama's statement was that he was promising that the spending discipline he claims to be imposing would persist even after budgetary good times returned. But the media should press him to commit on this. Those of us who recall the porous "firewall" of the "peace dividend" debates of 1991-94 remember well how skilled Congressional Democrats are at coming up with "exceptions" to spending rules that allow them to spend money they promised not to spend.
On that note, Obama should answer two more questions. One, which I think his plan already answers, is that he's not going to count cutting his "spread the wealth" checks to non-taxpayers as spending. If you can hand out a trillion dollars in checks, your political need to "spend" is greatly alleviated.
The second is whether he's planning to support billions in additional spending pushed by his party's Congressional leadership on top of this year's budget, in special sessions after the election:
After consulting with Barack Obama, Democratic leaders are likely to call Congress back to work after the election in hopes of passing legislation that would include extended jobless benefits, money for food stamps and possibly a tax rebate, officials said Saturday.
The bill's total cost could reach $150 billion, these officials said.
The officials stressed that no final decisions have been made. They spoke on condition of anonymity, saying they did not want to pre-empt a formal announcement. House Democrats have announced plans for an economic forum on Monday "to help Congress develop an economic recovery plan that focuses on creating jobs and strengthening our economy."
Democrats said Obama's campaign has been involved in discussions on a possible stimulus package.
If Obama is planning to push $150 billion in new spending in November, will he insist on a net spending cut, or is this yet another loophole so he can tell the American people one thing and do something completely different?
Or will the press just focus on Joe the Plumber's record?
The refundable tax credit is definitely disturbing. I'm a little skeptical about how he is going to pay for all that. The tax on the very wealthy is fine, but if he's simply going to redistribute it, then we'll never get ourselves out of our budget hole, never mind pay for his other programs. I think the refundability part of it has to go, or at the very, very least, limited to those who would owe taxes prior to the application of the credit.
The WSJ mentions the rising marginal rates for the working poor as a disincentive to working harder, but I notice a couple of problems with the graph they cite. One, it assumes that the family would be able to take advantage of -all- the credits at the same time, which seems unlikely. Two, it assumes a "worst case scenario" family - a child needing child care, a child in college and family income below $40,000. I doubt that is a representative low income family. It's morely likely that the rise in marginal rates is much less dramatic than the graph illustrates.
Still, a very troubling proposal.
Certainly one of John/Sarah's strongest arguments would be: "95% tax cut? THERE IS NO MONEY!" Perhaps they should also say something about, "Read my lips."
"Certainly one of John/Sarah's strongest arguments would be: "95% tax cut? THERE IS NO MONEY!""
Well, then McCain will have a problem defending his own tax cuts. I'd rather have both parties proposing that we don't cut taxes at all, but focus on the much tougher job of reducing spending. But unfortunately, yet again, I don't have that choice in this election.
The silence from the left on Obama's tax proposal is deafening.
So is there any reason I should think McCain's plan is any better? I'm reading this from the Tax Policy Center:
"Both John McCain and Barack Obama have proposed tax plans that would substantially increase the national debt over the next ten years, according to a newly updated analysis by the nonpartisan Tax Policy Center.
Neither candidate's plan would significantly increase economic growth unless offset by spending cuts or tax increases that the campaigns have not specified."
(There is pdf link to the full report on the same page.)
Notice that it says McCain's plan is ALSO would not significantly increase economic growth. Isn't that supposedly the point of his plan?
The political argument that there is no money would be simple and effective. And that's what it is, a political argument. So, of course, is Obama's "tax cut for 95%." It isn't a tax cut, and can only be accomplished by deficit spending or inflating the currency--probably both. Fortunately, it will probably be treated like the famous "middle-class tax cut" of 1992.
In evaluating Obama's economic nostrums there are three problems: First, I see no evidence that he understands anything about the subject. Second, his outlook is basically Marxist. Third, you can't trust a thing the man says, although I find his promises to save the world and slow the rise of the seas curiously intriguing.
There are excellent arguments for cutting spending, but cutting "the $15 billion a year on subsidies to insurance companies" is laughable. The amount is nigglingly small, and the insurance companies will need to find the money from somewhere else, possibly by decreasing services or raising fees. One way or another, someone will need to pay.
Taxes are an involved subject, and changes are fraught with danger due to unforeseen consequences, and to the tremors that changes send through the financial market. Changes should be both gradual and clearly seen as benign. I would recommend reduction (better yet, incremental elimination) of corporate profit taxes as the best way to stimulate the economy, bring real tax relief to lower-income families, and make American companies more competitive with foreign business.
And in a final comment, I would never trust any tax evaluation group--bipartisan or otherwise--that even *hints* that increasing taxes would somehow bring about improvement in economic growth.
"I would never trust any tax evaluation group--bipartisan or otherwise--that even *hints* that increasing taxes would somehow bring about improvement in economic growth."
I can understand you wanting more information about what they mean by the relationship between tax cuts, spending cuts and economic growth. But that's no reason to dismiss the source.
The executive summary itself does not explain that relationship, so I looked at other publications by the TPC that would explain it. As an example, see "Economic Effects of Making the 2001 and 2003 Tax Cuts Permanent," which is available at http://www.brookings.edu/~/media/Files/rc/papers/2004/08taxes_gale/20040817galeorszag.pdf
I'll quote a pertinent part, page 2:
"Section V examines the effects on long-term economic growth. The tax cuts offer
the potential to raise economic growth by improving incentives to work, save, and invest.
But the tax cuts also create income effects that reduce the need to engage in productive
economic activity, and they subsidize old capital, which provides windfall gains to asset
holders that undermine incentives for new activity. In addition, making the tax cuts
permanent would raise the deficit over the medium-term, in the absence of any short-term
financing. The increase in the deficit will reduce national saving -- and with it the capital
stock owned by Americans and future national income -- and raise interest rates, which
will negatively affect investment. The net effect of the tax cuts on growth is thus
theoretically uncertain. Several studies have quantified the various effects noted above in
different ways and used different models, yet all have come to the same conclusion:
Making the tax cuts permanent is likely to reduce, not increase, national income in the
long term unless the reduction in revenues is matched by an equal reduction in
government consumption. And even in that case, a positive impact on long-term growth
occurs only if the spending cuts occur contemporaneously, which has decidedly not
occurred, or if models with implausible features (like short-term Ricardian Equivalence)
are employed." (page 2)
"Empirical studies of the growth effects of actual U.S. tax cuts are relatively rare, in part because the U.S. had only one major tax cut between 1965 and 2000. Feldstein (1986) and Feldstein and Elmendorf (1989) find that the 1981 tax cuts had virtually no net impact on economic growth. This may be surprising, given the incentives created by
the large marginal rate cuts embodied in the 1981 tax cut. But the rate cuts also entailed income effects, and the act increased tax sheltering activities and the budget deficit, all of which militates toward negative effects on growth."
In other words, a tax cut per se won't automatically result in long-term economic growth (or even short-term) if they are associated with things such as increasing the debt/deficit, negative income effects, etc. So when that earlier summary talked about tax increases, I believe they were referring to those that would be necessary to reduce the deficit/debt, which would be a consequence of both candidates' tax plans.
And this is my main problem with the republican party. They have a "tax cuts always equals economic growth" orthodoxy which they rarely analyze with any sophistication. I have no reason to trust them any more than I do the democrats.
By the way, I cite those studies -only- to explore what the TPC meant by economic growth and taxes. I am NOT arguing that any particular tax cut, past or present, is good or bad based on those studies.
I forgot to add that the second quote is from pages 26-27 of the report.
It's going to very interesting what Obama's actually plans are. Because for all the reasons you said, his proposed spending and tax policies seem logically impossible. And if he goes back on his word on those things, he'll destroy the entire justification for his potential Presidency and prove that he's just another "say whatever he can to be elected and then tax and spend" liberal.
And you need to just keep re-posting this post everday until one of O's supporters has the courage to respond in a coherent manner.
"It's going to very interesting what Obama's actually plans are. Because for all the reasons you said, his proposed spending and tax policies seem logically impossible."
Given what I've posted above, McCain's plan doesn't sound any better.
MVH, I apply to the revenue-scoring projections of think tanks my Crank's First Law of Government Financial Forecasts: they are always, always wrong.
McCain's tax cut proposals are modest - all he's talking about in terms of changing current policy is corporate and capital gains taxes, and those tend to be the taxes where you get the biggest Laffer Curve bang for your buck.
My problem with Obama's plans is (1) the effect of his tax hikes on the economy (2) the unlikelihood that current federal taxpayers are going to see actual tax cuts rather than hikes (3) the large-scale handouts to people who are not current federal taxpayers and (4) the extreme unlikelihood given his record and proposals that he will do anything but vastly expand federal spending, especially if you count the "refundable tax credits" as spending. None of that is based on bean-counting multi-year projections keyed to unknowable economic variables.
What makes you think we are on the wrong side of the capital gains and corporate Laffer curves?
Consider this analysis of Gibson/Obama exchange:
"Both Gibson and Obama show their ignorance on the topic of capital gains taxation in this exchange. Gibson's implying that cutting capital gains taxes raises tax revenues by the mere time series correlation he cited was a stretch. Much of the short-run response to changes in the capital gains tax rate are for tax timing purposes. This is a well-known fact, and it is why CBO projects a huge spike in capital gains collections in 2010 (the last year of the scheduled low 15% rate on long-term gains) and thereby also a large decline in 2011 (when the rate on long-term gains is scheduled to revert to 20%) under current law. There is no doubt some revenue feedback will occur over the long-run from lower capital gains tax rates spurring investment, but most estimates would say that we are currently on the left side of the Laffer Curve with respect to capital gains. (That doesn't necessarily mean it should be increased, however, as that's a separate question. And whether it should or should not also depends upon dividend tax policy and labor tax policy as they too can affect capital gains behavior.)
But Obama didn't question this assumption made by Gibson. He seemed to be saying, "Okay Charlie, even if this is true, the rate should still be 28 percent." And that's a ludicrous statement too. Obama appeared to assume that even if we were indeed on the right side of the Laffer Curve (where revenues decrease from cutting tax rates, all else equal), he still doesn't want a free lunch. Any truly concerned liberal who favors increasing the size of government given such a situation would merely seek to find the rate that maximizes tax revenue, and then the progressivity issue could have been dealt with on the spending side by using that money to expand a social program (or a tax/spending program like EITC). Everyone would win (i.e. a free lunch), and we could "build our infrastructure, pay for everyone's health care, build our schools, (insert big government program here that sounds good to voters), and blah, blah, blah."
In summary, Obama should have questioned the assumption made by Gibson in the question. But then again, Gibson shouldn't have asked the question the way he did."
Also, as far as raising taxes as harming "the economy" is concerned, taxes are not the end/all be all of economic growth.
Consider the following analysis:
"From a macroeconomic perspective, however, changes in tax rates are but one of many factors that drive the time path of gross domestic product (G.D.P.), savings, investment, employment and other such variables. By itself, changing tax rates steers the economy about as much as would tapping an elephant on the leg with a chopstick. There may be some effect, but typically it is small and dwarfed by other effects.
Empirical support for this brash proposition can be found in the Economic Report of the President 2008. Table B-1 of the report features G.D.P. by year from 1959 to the present. Table B-18 lists “Private Investment” for the same years, broken down into “residential” and “non-residential” investment (that is, business investment). If one expresses the latter as a percentage of G.D.P. and plots the percentage on time, one should see in its time path the footprints of supply-side theory, which always is adduced to justify tax cuts. Supply-side theory suggests that tax cuts made economies more productive through greater investments by business.
Sources: Uwe E. Reinhardt, Economic Report of the President 2008
Alas, supply-side theorists will find little support in the president’s Economic Report. Over President Ronald Reagan’s tenure, the fraction of G.D.P. devoted to “non-residential” investment fell more or less steadily from about 13 percent to 11 percent, in spite of the sizable tax cuts he got passed. That fraction fell even further, from about 11 percent to about 10 percent, under President George H.W. Bush. The fraction then rose more or less steadily from about 10 percent to about 12 percent on President Bill Clinton’s watch, in spite of the sizable tax increases he got passed. Finally, on President George W. Bush’s watch, business investment as a percent of G.D.P. fell again, from about 12 percent to about 10 percent by 2004, and this in spite of the sizable 2001 and 2003 tax cuts. The percentage rose only slightly after 2004, but is bound to decline again in the current turmoil."
I'm sure many will dismiss this as an argument from a "liberal, Ivy League" economist, but if it's wrong, there should be some data that demonstrates it.
And keep in mind, even Laffer himself agrees that the Laffer curve should not be the focus of tax policy.
Anyone can say what they're going to do, but if not faced with the challenge, they don't know what they'll do. So the liberal illuminati and their media alliances are all wrong to tell everyone to go off of words vs. a record.