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| Source for data: Tax Policy Center |
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"I will not raise your taxes. Senator Obama wants to raise your taxes." - John McCain, Tampa, Florida, September 16, 2008
“Democrats want to use the slowdown as an excuse to do what their special interests are always begging for: higher taxes, bigger government, and less trade with other nations.” – Mitt Romney, Republican National Convention, 2008 “Taxes are too high ... he wants to raise them. His [Obama’s] tax increases are the fine print in his economic plan, and let me be specific… The Democratic nominee for president supports plans to raise income taxes ... raise payroll taxes ... raise investment income taxes ... raise the death tax ... raise business taxes ... and increase the tax burden on the American people by hundreds of billions of dollars. My sister Heather and her husband have just built a service station that's now opened for business — like millions of others who run small businesses…. How are they going to be any better off if taxes go up? Or maybe you're trying to keep your job at a plant in Michigan or Ohio ... or create jobs with clean coal from Pennsylvania or West Virginia ... or keep a small farm in the family right here in Minnesota…. How are you going to be better off if our opponent adds a massive tax burden to the American economy?” – Sarah Palin, Republican National Convention, 2008 “Lie”: (1) To make an untrue statement with intent to deceive; (2) to create a false or misleading impression. “Mislead”: To lead in a wrong direction or into a mistaken action or belief often by deliberate deceit. “Sucker”: A person easily cheated or deceived. (Merriam-Webster’s Online Dictionary) Fishing for a more polite word than “lie” to describe Republican claims about Obama’s tax plans, one hits on the word “mislead.” But “mislead” is actually misleading. Though the Republican claims typically aren’t strictly lies (they often say Obama will “raise taxes,” which is true, but true of McCain as well), the semantics of the Republican claims is clear: Barack Obama will raise your taxes. The truth is that he would almost certainly not raise your taxes but lower them, and that most likely he would lower them more than McCain would. Based on careful study of the candidates’ position papers, stump speeches, and interviews with advisors, the non-partisan Tax Policy Center has estimated the tax and fiscal consequences of Obama’s and McCain’s policy proposals. The proposals cut in opposite directions—McCain’s highly regressive, Obama’s quite progressive. McCain wants to put money in the hands of the wealthy (giving token sums to the poor and middle-classes); Obama wants to put money in the hands of the poor and middle-classes (with tax increases for the rich). (See above diagram and table for a broad picture.) As the report summarizes: Senator
McCain’s tax cuts would primarily benefit those with very high
incomes, almost all of whom would receive large tax cuts that would, on
average, raise their after-tax incomes by more than twice the average
for all households. Many fewer households at the bottom of the income
distribution would get tax cuts and those tax cuts would be small as a
share of after-tax income. In marked contrast, Senator Obama offers
much larger tax breaks to low- and middle-income taxpayers and would
increase taxes on high-income taxpayers. The largest tax cuts, as a
share of income, would go to those at the bottom of the income
distribution, while taxpayers with the highest income would see their
taxes rise significantly. (Analysis of Candidates’ Tax Plans:
Revised August 15, 2008, p. 4)
Not all the Republican statements are strictly lies, as noted. But gingerly stepping through a minefield implies that one knows where the mines are—that one isn’t ignorant of the truth but knows it and is withholding it. *Yes, Obama wants to raise income taxes (as Palin says). He wants the top two tax brackets (33 and 35 percent) returned to pre-2001 levels (36 and 39.6 percent, respectively) and all other tax brackets (10, 15, 25, and 28 percent) to remain unchanged. In practice this means income taxes will rise for families whose incomes exceed $169,480, but not for others, according to the Tax Policy Center. *And yes, Obama wants to raise “investment income taxes” (as Palin says). He wants to raise the maximum rate on capital gains and dividends from 15 to 20 percent for taxpayers with adjusted gross incomes over $250,000 for married couples and $200,000 for others, but keep it unchanged for everybody else. *And yes, Obama wants to raise payroll taxes (as Palin says). He plans a payroll surtax of 2 percent (paid by employers) on earnings over $250,000 plus a surtax of 2 percent of adjusted gross income in excess of $250,000. If you earn $250,000 or less, the payroll tax increase will be zero. *But does Obama want to raise the “death tax” (as Palin says)? (“Estate tax,” actually: you're taxed when you inherit, not when you die). The complexities of tax laws afford many opportunities for mischief with words, and the Republicans are taking full advantage here. One important point: very few people pay this tax—only about two percent of the population. One must have a rich parent, grandparent, aunt or uncle (not a spouse) who bequeaths one a pretty nice fortune to be subject to it. And even then some careful estate planning can obtain the exemptions needed to avoid all or most of it. Obama’s proposal is to permanently freeze the estate tax at its 2009 level—i.e., with a $3.5 million exemption and 45 percent rate. Under the tax cuts of 2001 the estate tax is gradually being phased out, declining from a $1 million exemption and a 55 percent rate in 2001 to zero in 2010, but then, curiously, returning to its 2001 level in 2011. In that context, Obama’s proposal to freeze the estate tax at its 2009 level is a tax cut, not an increase. However, if you take the zero level of 2010 as your baseline, Obama’s proposal is for an increase (but so is McCain’s, since McCain proposes making the tax permanent with a $5 million exemption and a 15 percent rate). One can decide for oneself whether one is being “misled” or worse by McCain, Palin and others when they say Obama wants to “raise” the “death tax.” But if you decide Obama does want to “raise” this tax, you’ll have to acknowledge that McCain also wants to “raise” it (albeit by a smaller amount). *Palin’s claim that Obama will “increase the tax burden on the American people by hundreds of billions of dollars” is curious because it’s unambiguously false. It’s true Obama would increase the tax burden on some Americans, the richest five percent or so. But the “American people” (universally-quantified) will get a net tax cut of 0.4 percent in 2009 and 2.6 percent in 2012, according to Tax Policy Center estimates. Both candidates want to cut nearly everyone’s taxes. But the differences in magnitude, for some segments of the population, are astounding. (See chart to right.) Taxpayers in the second highest quintile get on average a tax cut 27 percent larger under Obama than under McCain. Taxpayers in third highest quintile get on average a tax cut 3.7 times larger under Obama than under McCain. Taxpayers in the next-to-lowest quintile get on average a tax cut eight times larger under Obama than under McCain. And Obama’s proposed tax cut for people in the lowest quintile is more than 26 times that offered by McCain! It’s not close. If who will give you the largest tax cut is an important criterion for you in selecting a presidential candidate, then almost certainly you should vote for Obama. Unless, of course, your household income is in the top 10 percent or so of the income distribution. Then and only then do you get a better deal from McCain. Another way of looking at this: McCain’s tax cuts for the top 20 percent of income recipients are on average almost four times as large as those he proposes for the bottom 80 percent of the income distribution (2.3% versus 0.6%). More strikingly, McCain’s tax cuts for the top 1 percent of income recipients are on average 13 times larger than those he proposes for the bottom 20 percent (2.6% versus 0.2%). Though Republican claims about Obama’s tax proposals usually aren’t strictly lies, the semantics of the Republican claims, as noted above, is clear: Barack Obama will raise your taxes. The question the media should scrutinize is: Will Barack Obama in fact raise people’s taxes? And what they should report is (a) that for nearly all taxpayers Obama will not raise their taxes, and (b) that for about 80 percent of taxpayers he will lower them more than McCain would. How to get the media to report this factual, relevant information is a conundrum. Distributional Effects Obama’s tax policies are a good deal more progressive than many on the left, I suspect, realize. A lot of tax cuts, yes, but they’re targeted by and large to the right people. The after-tax effects on income of Obama’s and McCain's proposals (as projected by the Tax Policy Center) are like this::  The proposals cut in opposite directions—Obama’s very progressive, McCain's very regressive. Which isn't to say Obama doesn't give upper-income people a good deal. Even if you’re in the fourth quintile, for example (with income ranging from $66,000 to $112,000), chances are you’ll do better under Obama than under McCain. Absurdity plays itself out in the stratospheric income levels.  So McCain wants to give people with incomes $2,871,682 and up (top 0.1 percent) a more-than-10-percent increase in after-tax income? That means that an investment banker at the managing director level, with an average pay package in 2005 of $2.2 million to $3.3 million, would receive an increase in after-tax income of roughly $200,000 to $300,000 (exact numbers aren’t too important here). A global head of investment banking, who “could pull in on average anywhere between $7 million to $10 million” (Susanne Craig, Wall Street Journal), would see an increase in after-tax income of roughly $700,000 to $1 million. "Regressive" is not the word. "Hyper-regressive" or "regressivity on steroids," perhaps. Why is this important? Fairness, Growth It isn’t just about fairness, though it is about that. Progressive income taxation curbs a market economy’s tendency toward increasing inequality of income and wealth distribution. And income distribution has demonstrably worsened in recent decades. (See chart below. Note the period 2001 to 2005, a time of economic expansion, in which the top 1 percent raised its share by 21 percent (12.6 to 15.6) while the bottom 60 percent lost 6 percent of its share. Also see chart to right, which shows the Gini index, a measure of inequality of income. A low value means greater equality, a high value less.) So fairness is part of it.  Source: CBO, Table 1C. But it’s also about growth. In the post-World War II period the U.S. economy has grown faster under Democratic presidents than under Republicans. Annual growth of real GNP under Democrats has averaged 2.78 percent per capita, while under Republicans it’s averaged just 1.64 percent. Why this is, no one knows for sure. But some (including left-leaning economists like myself) suspect a connection to another identifiable difference between Democratic and Republican eras: that income inequality has grown markedly during Republican administrations and tended to diminish slightly during Democratic ones. (See chart to right). Why this occurs is no mystery. Democrats tend to favor more expansionary fiscal policies and raising the minimum wage, while Republicans are more likely to cut taxes regressively and seek to influence the Federal Reserve to maintain a tight monetary policy to fight inflation. Why would greater equality of income promote growth? A crucial function of markets is to move money around. When money moves from one hand to another, that entails that some human want or need gets satisfied. What goes wrong sometimes is that money doesn’t get passed from hand to hand, but gets held or hoarded. There are reasons why this would occur. Money is the only perfectly liquid asset, i.e., you can exchange it for anything (that’s for sale) at any time. And in this respect money contrasts with all other assets, which must be sold (i.e., exchanged for money) before they can be used to acquire other goods, services, or assets. And from time to time, when there’s uncertainty about the economy and asset prices (especially in non-inflationary, stagnant times), people will flock to the one asset that they know definitely has value, i.e., money. The point is to get people to spend. And spending is generally higher when income is more evenly spread than when it's narrowly concentrated, since the poor and middle-classes have a higher propensity to consume than the wealthy. So better distribution stimulates increased economic activity and potentially higher growth. What does Obama offer? As economist Alan Blinder observes, “If history is a guide, an Obama victory in November would lead to faster economic growth with less inequality, while a McCain victory would lead to slower economic growth with more inequality. Which part of the Obama menu don’t you like?” A Healthcare Crisis The number of Americans without health insurance is now 45.7 million, according to the latest U.S. Census Bureau figures, an increase of 4.5 million from 2001. One index of the state of healthcare in the U.S. is the number of people who die because of lack of coverage. A 2002 study by the Institute of Medicine (IOM) found that uninsured adults were 25 percent more likely than insured adults to die prematurely. The report also estimated that 18,000 Americans died in 2000 because they lacked health insurance. And a recent Urban Institute analysis, using the IOM’s methodology and U.S. Census figures on the number of uninsured, estimated that from 2000 to 2006 about 137,000 Americans died for lack of health coverage. These numbers perhaps shouldn't be surprising. If people lack access to preventive care, fail to get timely diagnoses or appropriate treatments, or can’t afford proper medications—all problems that plague the uninsured—these things should be reflected in mortality statistics. The state of health in the U.S. is also seen in health indicators like life expectancy and infant mortality. Americans die younger than citizens of nearly all other advanced industrialized countries. (See chart. And note that in most surveys Denmark comes out ahead of the U.S. which typically ranks last.) And we lead the advanced industrialized world in infant mortality. If these numbers aren’t a source of shame, they should at least be a source of embarrassment. Then there are bankruptcies. A study published in Health Affairs found that half of U.S. bankruptcies, affecting two million people annually, were attributable to illness or medical bills. This is a result both of lack of coverage and of thin coverage (i.e., coverage with high deductibles, high coinsurance rates, high copayments, and/or high out-of-pocket costs because many services aren’t covered). All of this is astonishing when one considers (a) that the United States is the richest country in the world, (b) that Americans pay more for healthcare than the citizens of any other country (see chart, below right), and (c) that deaths and bankruptcies arising from inadequate medical coverage are virtually nonexistent in all the other advanced industrialized countries. Both John McCain and Barack Obama propose solutions to the healthcare crisis. What are their plans and how effective would they be? The McCain Plan Main components:
The McCain plan would also allow people to purchase insurance across state lines. This would undermine state-mandated consumer protections (e.g., that plans cover annual physical examinations, prenatal care, childbirth, children’s vaccinations, women’s breast exams, etc.), since some (and perhaps many) state residents would seek cheaper coverage in states with unregulated markets, driving up costs in the regulated markets, and leaving providers in those markets in the unprofitable business of insuring disproportionately “high-risk” individuals. The vision behind the McCain plan is of a national free market in healthcare coverage that, per free market ideology, promotes competition and lower prices, and offers plans tailored to individual needs. This is a beautiful image. And would that it were not a mirage. The unfettered free market is the best way to coordinate the production and distribution of a great many goods and services. But health insurance (like financial services) isn’t one of them. The individual or non-group insurance market suffers from various well-known inefficiencies, for example,
But the McCain plan has another problem: that the tax credits almost certainly won’t keep pace with the rising costs of insurance. The tax credits presumably will be indexed to inflation, most likely to the consumer price index (CPI). But if the annual increase in health insurance premiums exceeds the rate of inflation, as it has in recent years, insurance will become increasingly expensive in real terms, encouraging more and more people to drop their coverage. And in the long run we’ll almost certainly find ourselves back where we are now, with an unconscionable number of Americans uninsured. Thomas Buchmueller, Sherry A. Glied, Anne Royalty, and Katherine Swartz, writing in Health Affairs, calculate, for example, that if the rise in insurance premiums exceeds the rate of inflation by six percent, as it has from 1999 to 2007, then “the value of the credit would be eroded so much that [after an initial modest decline in the number of uninsured] in just five years, five million more people would be uninsured.” So how effectively would the McCain plan address the healthcare crisis? Not very, say independent experts. “Most uninsured Americans would probably remain uninsured under the McCain plan,” writes Jeff Oberlander in a cogent exposition of the McCain and Obama healthcare plans in the New England Journal of Medicine. He also observes, “With the proposed credits many could afford only high-deductible insurance policies, so the plan could trigger a move to thinner coverage policies that shift costs onto sicker patients.” Buchmueller, Glied, Royalty, and Swartz similarly conclude that the McCain plan will initially “have little impact on the number of uninsured people, although within five years this number [of uninsured] will likely grow as the value of the tax credit falls relative to rising health care costs.” They also observe that “moving toward a relatively unregulated nongroup market will tend to raise costs, reduce the generosity of benefits, and leave people with fewer consumer protections.” So the McCain plan (a) will have little or no long-term impact on the number of uninsured, and (b) will lower the quality of coverage, itself is a major aspect of the crisis. It's hard to see where the attractions of this plan lie. The Obama Plan Main components:
The biggest complaints about the Obama plan are (a) that it will not provide universal coverage, (b) that it lacks a viable financing source, and (c) that it doesn’t address cost inefficiencies that arise from subsidization of healthcare. It’s true that the Obama plan would not provide universal coverage. The Tax Policy Center estimates, for example, that the number of uninsured Americans would fall by about 34 million by 2018, but that nearly 33 million adults would remain uninsured. So the plan is estimated to cut the number of uninsured in half. (Nearly all children would be covered because of the child mandate.) This is progress and far superior to what the McCain plan offers. But it leaves a hole that could have been filled by an individual mandate, a feature of the healthcare plans of Hillary Clinton and John Edwards, that requires that all individuals purchase healthcare coverage (with subsidies for people with low incomes). Why Obama opposes an individual mandate is unclear, though it could relate to a perceived lack of political viability or the principle that people shouldn’t be forced to buy what they don’t want. In any case he hasn’t ruled out a mandate should universal coverage fail to materialize. One can debate the desirability of an individual mandate. But the benefit is clear—nearly universal coverage. The life-blood of insurance is a large pool of high-risk and low-risk individuals, where, it’s true, the low-risk ones subsidize the high-risk ones. The benefits may seem to flow primarily in one direction. But low-risk individuals also benefit in several ways:
Some economists argue that subsidizing healthcare coverage encourages spending on unnecessary procedures and services, driving healthcare costs artificially high. If everyone were given, for example, a $100 certificate redeemable only for healthcare, many would use the full $100 whether they needed it or not, since otherwise the money would go to waste. Quantity of healthcare demanded would then be artificially high, pushing overall healthcare costs above what they rationally ought to be. Some economists believe this is the major reason for rapidly rising healthcare costs. Obama’s plan includes subsidies for low-income people and so might be vulnerable to this critique. If this is a problem for the Obama plan, that would be an irony since the philosophy behind the plan is to lower healthcare costs to make healthcare coverage more accessible. To this end Obama proposes various pooling mechanisms, discussed above (to promote economies of scale and lower administrative and marketing costs), plus a host of cost-control measures. But some economists attack cost-control from a different angle: not through pooling but through efficiencies theoretically achieved through the disciplining hand of the individual insurance market. Indeed this is an argument for the McCain plan, since the goal of the McCain plan appears to be to shepherd Americans into the individual insurance market. The latter, by tailoring healthcare plans to each individual, should ration healthcare to just those procedures and services that are necessary. But is this likely to work out in practice? The answer is no because of the inherent inefficiencies of the individual insurance market discussed above. But if we assume for the moment that those inefficiencies don’t exist, we see a separate problem with the individual insurance market (and with the McCain plan). In the economists’ ideal world, everybody would purchase exactly as much healthcare coverage as they need. If one has a heart attack at, say, 59, this and all other healthcare expenditures throughout life should be exactly covered by the premiums one pays plus an additional “risk premium” to the insurance company as a reward for incurring risk. But how does the individual know how much insurance to buy? Through the disciplining hand of the market. It works like this. If I under-purchase apples one week, I suffer the consequence of not having enough apples. Accordingly I correct my behavior and next week I purchase enough apples to cover my needs. If I over-purchase apples, again I suffer the consequences, this time in the form of rotting apples and money expended unnecessarily. But again I learn, and next time I purchase a more suitable quantity of apples. An essential aspect of how markets work is that people pay a price for miscalculation. If they paid no price, there would be no incentive to modify behavior so as to make “correct” consumption choices that ultimately enable markets to clear and equilibrium prices to be determined. With many products the cost of miscalculation isn’t severe; it’s just inconvenience. If I under-purchase apples and as a result run out, that’s unfortunate but not the end of the world. With other products the learning process is more savage. If I under-purchase health insurance and as a result don’t have coverage when I need it, that really could be the end of the world. Never mind modifying my behavior so that my needs and the product I purchase match up better next time. There may not be a “next time” at which to express my newfound knowledge. Why do markets work so well for apples and so badly for health insurance? Part of the problem is that we can’t see into the future, and insurance is a product whose ultimate value depends on future events. So valuing it is tricky. More generally, markets work well for products that are simple and not so well for products that are complex Apples are a simple product. They’re well within the cognitive capacities of humans to understand in all aspects relevant to making sensible consumer decisions. Insurance is a complex product. Policies vary along multiple dimensions, like deductibles and co-payments, what’s covered, treatment options, limits on coverage, and so forth. And the relationship between client and provider is adversarial. You want your provider to pay your medical bills. Your provider doesn’t want to pay them, if it can avoid it. And it’s not an even match. People generally lack the time or inclination or capacity to wrap their minds around the complexities of an insurance policy. Providers have decades if not centuries of accumulated knowledge and are well practiced in the art of denying payment. So the individual insurance market (hence the McCain plan) is problematic in part because of inherent cost inefficiencies (a problem addressed by pooling mechanisms, envisaged in the Obama plan). But it's also problematic because processes of market adjustment can exact a barbaric toll on consumers. Miscalculation (a normal part of the trial-and-error process of market adjustment) can have dire consequences, spelling bankruptcy and even death in some cases. And because the product is so complex, the likelihood of miscalculation is high. At the very least consumer protections, which the Obama plan promotes but the McCain plan dismantles, are essential. Most generally, there’s a fundamental conflict between the unfettered free market and the nature of insurance. Insurance is an inherently social product. When you buy an insurance policy you’re in effect partnering with a bunch of other people, each of whom contributes to a pool that participants can draw from under specified circumstances. A problem arises from the fact that the locus of decision-making in markets is the individual. As a consumer, one must choose the best deal for oneself that one can. If you’re a low-risk individual (young and healthy), you’ll probably select a fairly thin and inexpensive plan. But you’re thereby partnering with a bunch of other low-risk people, and that leaves higher-risk people (the elderly and the sick) outside the pool. The result is the crisis we see today: insurance often unaffordable for those who need it most. In fairness, McCain proposes a “guaranteed access plan,” modeled on plans in 34 states, to provide a national pool for those uninsurable in the individual market. But as Jonathan Oberlander observes, “state high-risk pools ironically suffer from the same problems (high costs, limited benefits, preexisting-condition exclusions) that plague the insurance markets from which they are supposed to offer refuge. Furthermore, the McCain plan for interstate insurance markets could weaken regulatory protections in some states.” The McCain plan is a recipe for continuation (and possible deepening) of the catastrophe that is the American healthcare system. The Obama plan is imperfect. It will not provide universal coverage. But it is a sorely-needed step in the right direction. |
Other Postings The Point of the Public Plan The Context of Health Care Reform Addendum Is Low Life Expectancy the Fault of Our Health Care System? What Americans Believe American Health Care: Best in the World? Is 76.5 Large? NBC-WSJ Poll Inside the Asylum More About Bubbles Why Did Economists Miss the Housing Bubble? Why Has Monetary Policy Been so Ineffective? The Geithner Plan Is 22.2 Large? Economics: A Theoretical Divide The New Deal and the Great Depression Stimulus By the Skin of Our Teeth The Difference Between Dems and Repubs The Interregnum Postmortem Obama and McCain on Tax Cuts and Health Care Religion and the New Atheism Home   Source: United Nations: Human Development Reports  Source: Alan Blinder, New York Times, “Would Obama’s Plan Be Faster, Fairer, Stronger?” August 30, 2008.   Source: United Nations World Population Prospects: 2006 Revision  Source: World Health Organization: Core Health Indicators  |