« A reform proposal for Zimbabwean inflation | Main | Designing Monopoly »
John McCain's proposed tax hike
Jason Furman and Austan Goolsbee write:
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. Sen. McCain's plan will count the health care you get from your employer as if it were taxable cash income. 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. In addition, as the Congressional Budget Office has shown, this kind of plan would push people into higher tax brackets and increase the taxes people pay as their compensation rises, raising marginal tax rates by even more than if we let the entire Bush tax-cut plan expire tomorrow.
The piece is interesting throughout, for instance:
Overall, Sen. Obama's middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000, making the proposal as a whole a net tax cut and reducing revenues to less than 18.2% of GDP -- the level of taxes that prevailed under President Reagan.
I would look more closely at the implied structure of fiscal commitments over time and what each candidate is likely to actually do (as opposed to promise) when it comes to Medicare and other health care issues.
Posted by Tyler Cowen on August 15, 2008 at 05:54 AM in Economics | Permalink
Comments
I cringe whenever a politician tells us of his/her 'plan' for anything. ;-(
Posted by: Speedmaster at Aug 15, 2008 7:09:23 AM
File both McCain's and Obama's "plans" under fiction. Whoever is elected will have a major economic crisis (possibly a global recession) to deal with, and all these plans go out the window on day one. And both candidates know it unless they've been drinking their own Kool-Aid.
This is pure electoral theater, like a WWE wrestling storyline. Discussing as though any of this were real or relevant is an utter waste of time.
Posted by: at Aug 15, 2008 7:23:28 AM
this kind of plan would push people into higher tax brackets
It would push a lot of people to become self-employed (i.e. contractors). I am already at the margin as someone who gets rather little value (compared to the nominal dollar cost) from the health insurance provided by my employer. But I'm not yet quite annoyed enough to try to strike out on my own and convert that benefit into cash compensation. Under McCain's plan I would almost have to, however.
Posted by: bbartlog at Aug 15, 2008 8:08:08 AM
However, a plan to count health care from an employer as taxable income but provide a credit up to a certain amount is still a good idea. As I recall (and Greg Mankiw points out), Jason Furman said nice things about such a plan when he wasn't a political advisor for a campaign. Encouraging compensation to be taken as benefits through tax loopholes is inefficient.
Also, of course, the change would, as the CBO has shown, decrease the taxes of the lower 4 quintiles and increase that on the upper quintile as a whole. It's true that it might "eventually" raise taxes on middle-class families, if health-care expenditures keep rising as a percentage of compensation even with equal tax treatment. But that assumes that ordinary tax rates would never be reduced to compensate and that the level of the tax credit would never be increased.
It does seems like Goolsbee and Furman are walking back from their previous suggestions that dividends could be treated as ordinary income. I also recall Sen. Obama suggesting lifting the FICA cap, perhaps after a doughnut level, before, but now it seems like instead of the entire tax they claim that they would impose only a few percentage points. Perhaps they'll end up doing the same on capital gains as well eventually.
Posted by: John Thacker at Aug 15, 2008 8:21:54 AM
This all points to the need for tax code simplification. It has become almost impossible to figure out what exactly is a tax increase or a tax cut. Too often calls for tax code simplification are tied to serious reductions in tax revenue and/or progressivity, and thus have a zero chance of political success. Even if tax revenues were not cut and progressive marginal rates were retained, a simplified tax code would at least allow people to more clearly evaluate proposals by politicians.
Posted by: liberalarts at Aug 15, 2008 8:34:44 AM
I don't understand why the words "his/her _ plan would ..."; these are presidential candidates. They can veto legislation or not. They don't have any legal authority over these decisions anyways. The president can't actually substantially change any of these things, at all really. Any evidence that presidents, in general, exert any significant pressure on the final form of legislation? Am I missing something here?
Posted by: Kenny at Aug 15, 2008 8:56:46 AM
Liberalarts: while I agree that tax code simplification is a good thing, and that it is too often tied to serious cuts in revenue/progressivity that makes it unpopular, I don't think it is that difficult to tell what is a tax increase or a tax cut, at least not for someone who has done their taxes before. It's just that the media doesn't seem to focus on this or explain it.
While the constant avoidance of the news talking about McCain's clear tax increase on health care and the repetition of "Obama is going to raise taxes" when he's running on cutting taxes may be interpreted as pro-McCain, anti-Obama bias, I don't think so. It's probably a business decision--who other than us crazy econ blog readers cares about the wonky parts of policy that probably won't ever get enacted? Most people would probably change the channel after 30 seconds.
Posted by: brian at Aug 15, 2008 9:05:06 AM
Brian -I disagree with the ease of telling whether someething is a tax cut or increase. Sure I can do it, but balancing (lump sum) tax credits against increases in taxable income is very tricky to do without studying the tax tables. People's taxable income increases may be evaluated at multiple tax rates (do to possible bracket changes induced by the change) and may trigger phase outs of other deductions or credits. I would venture to guess that very few people know their own effective marginal tax rate. I know mine, but then again I have a Ph.D. in economics and continually review my tax circumstances. Even fewer people know what their marginal tax rate will be in retirement, and thus they do not know the true tax burden on monies that they tax defer in pension accounts.
Posted by: liberalarts at Aug 15, 2008 9:25:01 AM
By the way, actually doing taxes is very, very simple using TurboTax or TaxCut software. My above point is that it is hard to know in advance what one's current marginal tax rate is and what the effect of a policy change is on marginal tax rates and total tax burden.
Posted by: liberalarts at Aug 15, 2008 9:28:49 AM
You missed the biggest laugher of the piece
“Sen. Obama does not support uncapping the full payroll tax of 12.4% rate. Instead, he is considering plans that would ASK those making over $250,000 to pay in the range of 2% to 4% more in total (combined employer and employee).”
Since when does the IRS ask me to pay taxes? My understanding is that it is more of a demand.
Posted by: joe at Aug 15, 2008 10:14:05 AM
John Thacker, couldn't you also offset the
tax-base increase by lowering rates, so that the change would be revenue-neutral?
I think it would be a good thing to get away from employer-paid health care. If we eliminate the differential tax treatment of employer-paid health care vs. employee-paid health care, there would no longer be any rationale for employer-paid health care.
Also, it's good to discuss the issue, even though we can't rely on either candidate's current statements as a guarantee of what will happen if he's elected.
Posted by: Richard at Aug 15, 2008 10:19:04 AM
McCain's plan to tax benefits will NOT be a general tax increase, because every dollar of tax paid by a person getting those untaxed benefits will be offset by a reduction in the taxes of those, like me, who are indirectly subsidizing the benefits by paying more than our fair share of federal taxes.
All income, whether in the form of cash or benefits, from whatever source, should be taxed if we are to have a fair and rational system. The current system, besides being unfair, leads to overspending on healthcare and underspending on alternatives, like a decent education.
Posted by: jimbino at Aug 15, 2008 10:52:32 AM
No one asked me, but we really should have a consumption tax. You show your income and you show how much you've saved and the difference is taxed. Since you have an easily determined tax base, progressivity and exclusion on income would be easy. I prefer taxing consumption to taxing income (earned and investment).
As far as the plans, tax legislation arises from the House Ways means committee, so Charlie Rangel's plan is what we should be discussing.
In any case the discussion is almost impossible to have because wide variables affect each taxpayer: mortgagee? Schedule A or Schedule C income (or other schedule)? Children? Student loans? How much in state taxes and property taxes? Miscellaneous itemized deductions? AMT?
And if you just want to discuss tax and fiscal policy, all the politicians manipulate the phase-outs. For example, Obama likes to say he’s not raising taxes because the Bush cuts are just expiring, but he includes the projected revenues in his budget analysis. McCain is similarly lying.
Posted by: guy in the veal calf office at Aug 15, 2008 1:44:46 PM
Will the taxed health benfits apply to the US Congress? Probably a loophole already exists for them.
Posted by: Dennis Webb at Aug 15, 2008 4:25:32 PM
McCain's health plan is revenue neutral. It doesn't raise taxes. It redistributes tax subsidies for health insurance by replacing the current system with a $5,000 annual tax credit for every family -- regardless of income and regardless of how the insurance is purchased.
The huge beneficiaries of this plan are middle and lower-income families. But even high-income families will benefit from better incentives. No longer will people be able to lower their taxes by buying more health insurance. And, if people find ways to economize on insurance costs, every dollar they save is a dollar of after-tax income they get to keep.
Posted by: John Goodman at Aug 15, 2008 4:56:18 PM
The comments to the effect that tax changes will be lesiglated by Congress and therefore only Charlie Rangel matters, and what Obama or McCain says doesn't matter, make no sense. A president plays a major role in the legislative process. The threat of veto (expressed or implied) will affect the form in which any legislation will come out of Congress. A president, through use of the "bully pulpit" can affect public opinion among congressmen's constituents, and thereby affect their actions. And a president can grant (or withhold) favors from congressmen, and thereby affect their votes.
Posted by: Richard at Aug 15, 2008 6:03:27 PM
@ Kenny: The president's office is the single largest originator of legislation. Given that offices bargaining power (the veto), I would pay attention when they propose a plan.
Secondly, the director of the GAO was on Glenn Beck's program (I know, not the most bias show, but the GAO is supposedly unbiased). The director said that if the gov. were required to do accounting like a corporation--acount for future liabilities--the U.S. would have a situation in the forseeable future where a 100% tax rate wouldn't cover everything. His basic point was that the spending the U.S. does, and is set to do under social security, medicare, medicaid, etc..., is for more detrimental to our future than what we tax ourselves. As this is an economics blog I understand the interest in current tax rates, but I think the gov.'s long term expenditures are th real problem. The next G.M. or Ford could be the U.S. gov.
Posted by: Steve at Aug 15, 2008 9:24:32 PM
According to my Cowen to english dictionary, this post means "Ignore the candidates tax plans, and focus on their plans to cut entitlement spending, because Medicare spending will very quickly become the primary reason for changes in fiscal policy."
Posted by: sourcreamus at Aug 16, 2008 12:44:51 PM
It will certainly raise enormous sums over time, but I am doubtful it will yield any cost reductions.
Posted by: Lord at Aug 19, 2008 7:14:07 PM
aion kina
aion online kina
aion gold
aion online gold
Posted by: aion kina at Mar 18, 2009 10:34:31 PM
