Thursday, January 31, 2008

Tax policy in the Obama-Clinton presidential debate

The language of tax policy -- especially when we need to figure out how to avoid bankrupting the Republic with high taxes on lower incomes and low taxes on high incomes -- is endless fascinating (at least, to me).

How we convince the majority of the electorate to support the estate tax and higher marginal income tax rates on high tax brackets is crucial to whether we'll have the common wealth to buy health care for everyone, higher education for everyone and shift away from foreign oil as the bedrock of our economy. We just need to spend more money on infrastructure to make everyone better off, and that money is going to come from the people who have the most of it. That means higher taxes for high incomes.

Anyway, after the LA Times moderator asked about how they would respond to the inevitable Republican critique that they intend to raise taxes, here is what I heard:

Barack Obama:

It's not tax cuts or tax hikes but it's about who the tax cuts go to and who the tax hikes are imposed upon.

We now have a trillion dollars worth of corporate tax loopholes and tax cuts that go to the top 1 percent who didn't need them and didn't even ask for them.

My plan gives people making $75,000 or less a tax cut.

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Hillary Clinton:

This isn't raising taxes -- this is people making more than $250,000 a year on Bush tax cuts that are set to expire.

There have been enormous tax giveaways on HMOs.

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Back to Barack Obama (after the moderator tries to clarify that these are tax hikes:

On wealthy Americans. I'm not bashful about it. This looks like a well-dressed crowd. They might pay more. I would pay a little bit more. We have a moral obligation.

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Hillary Clinton:

It's important to keep in mind that we would go back to the tax rates before George Bush was president. People did very well in that time and they would do very well again.

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Hillary's last line got the best reaction from the audience.

That suggests that it's important to shift away from the discussion on higher taxes or lower taxes, and focus on the results of those taxes on the economy. Either we have Clinton taxes or we have Bush taxes. Which one would you prefer?

I also think that it would be very helpful for the candidates to personalize not making much money. Just because they are pulling down six figures now as Senators doesn't mean they should cut themselves off from their days of not making much money. I think that's an authentic message -- I was broke five years ago! -- that helps validate the call for higher marginal income tax rates (it's on those high income guys, not on us).

To shift from one University of Chicago professor to another, there is a great column in the New York Times by Nicholas Epley on the psychology of the term tax rebate versus a tax bonus. According to Epley, most people think of a rebate as their own money returned to them, so they save it. They don't see it as a windfall. A tax bonus, on the other hand, is seen as extra, so more people spend it since it doesn't cut into their budget.

Since the purpose of the stimulus is to get us to spend the money rather than save it, Epley's point is that we should call the check a tax bonus and not a tax rebate. Smart.

1 comment:

Amy said...

Hi Dan!

I am enjoying watching the primary race play out in America from across the pond- and of course rooting for the guy who sponsored our Instant Runoff Voting legislation in the Illinois legislature!

Regarding taxes, I recently read a very interesting book about the history of housing markets and their relation to the economy- it's called Boom, Bust and it's by a guy names Fred Harrison. It focuses on the UK but there is also a lot of discussion about the US and the rest of the world. He claims that we would not have these dramatic housing booms and busts if governments were smarter about how they design their tax systems.

I'll try and summarize it here. The idea is that any capital gains on property should really belong to everyone - the value of homes go up when good restaurants pop up or a new train line runs through the town - and those improvements are the result of investments from property owners and renters alike, so why should all of the benefit go to property owners? By heavily taxing capital gains you remove property speculation, which drives property values to absurd levels. He claims that there could be so much money made from this method of taxation that the income tax could be removed altogether (in the UK at least). This system would reward people for being productive and earning an income, and put gains from public investments back into the community, instead of allowing people to just buy a piece of property and simply watch the price go up as a result of others' investments in the community.

Turns out there is an 18 year cycle to housing markets, the author of this book predicted the current one 3 years ago (I didn't quite understand why it's 18 years) and he says a recession always follows a housing market crash (not the other way around). Anyway it's an interesting read. I wouldn't think I would ever be absorbed by a book about tax policy and housing markets, but I was.

I also don't normally read blogs but yours is actually interesting! Keep up the good work, Dan!

Amy Connolly/Hill