Obama tax plan

I admittedly have a hard time getting interested in politically hypothetical tax reform plans, such as those announced by candidates who appear to be long shots, and who even if elected might have to change course. Then again, it turns out that everyone (certainly including me) should have paid a lot more attention to what Bush was saying about taxes in 1999, since, astonishingly enough, crazy though it was, he actually meant it.

Thus, I suppose I should comment on Barack Obama's tax plan, announced yesterday in a D.C. think tank speech, although i don't think he'll get very far and even if he did he might learn that Democratic Congresses don't follow executive direction (at least from their own party - they're certainly puppy dogs for Bush on national security issues).

Obama's tax advisor is Austan Goolsbee of the University of Chicago, which I would say generally bodes well for his proposals. But he is (obviously) operating in a political environment, and particular one in which he is behind. Not always the best prescription for good policy. Anyway, here goes. According to his website, he proposes the following:

Obama’s middle class tax relief plan would provide $80-85 billion in tax cuts to America’s workers, seniors and homeowners by:

* Cutting taxes for 150 million Americans and their families, allowing them to get a tax cut of up to $1000.
* Easing the burden on the middle class by providing a universal homeowner’s tax credit to those who do not itemize their deductions, immediately benefiting 10 million homeowners, the majority of whom make under $50,000 per year.
* Eliminating the income tax for any American senior making less than $50,000 per year, eliminating income taxes for about 7 million American seniors.
* Simplifying tax filings so millions of Americans can do their taxes in less than 5 minutes.

Obama would pay for his tax reform plan by closing corporate loopholes, cracking down on international tax havens, closing the carried interest loophole, and increasing the dividends and capital gains rate for the top bracket."

A few comments from me:

1) Given the fiscal gap, I'm not a big fan of $80 billion of tax breaks for anyone - those getting them will probably end up giving them back in a few years, through tax increases plus benefit cuts, even if fully financed

2) Apparently a $1,000 tax credit for middle class folks, phased out as income rises. Not great in efficiency terms - no marginal effect on incentives, except for the bad effect of increased marginal tax rates in the phase-out range. Again, I really don't think we're giving people anything on a lifetime basis if they are effectively going to have to pay it back in a few years.

3) I am not a big fan of the home mortgage interest deduction. Admittedly there's no point I can see to limiting it to those who itemize their deductions. A flat percentage credit that cost the same total amount as the current deduction (which rises in value with marginal tax rates) sounds like an improvement - see the recent Batchelder, Goldberg, and Orszag article in the Stanford Law Review on refundable credits. But giving non-itemizers more would require giving itemizers less if it isn't losing revenue, and I doubt this is what Obama has in mind.

4) No income tax for seniors earning $50,000. Just what we needed, a big giveaway to current seniors. Admittedly, we may want to benefit the low-earners among seniors if they don't have enough retirement saving plus benefits. But this is a big tax cut for all seniors unless we raise marginal tax rates on seniors above $50,000 in order to get back to the same place. One possible efficiency benefit, depending on the tradeoff if higher-income seniors face increased marginal rates - seniors have unusually responsive labor supply, so in an optimal tax sense they arguably should face lower marginal rates. But basically I don't like this proposal, and the word pandering occurs to me (as with the $1,000 credit).

5) Simplifying tax filing - I believe this is the Joe Bankman / California "Ready Return" idea. A great idea, and if anything that's understating it. I am hoping Joe publishes his account of the disgracefully sleazy actions of Intuit in California, killing Ready Return there because they thought it would diminish their rents. It's one thing for corporations to seek tax breaks for themselves - that's expected - it's worse for them to try to screw their customers, which is what Intuit was essentially doing.

6) Closing corporate loopholes and cracking down on tax havens - great in principle, but let's see the details. Revenue claims from this could easily be overstated. If worth doing, it should be done to raise revenue on balance given the fiscal gap.

7) Closing the carried interest loophole - I think I've heard of this issue somewhere. While I agree with doing this, one wonders about the revenue claims.

8) Raise capital gains and dividend rates - The former sounds fine on balance so long as it stops sufficiently short of the revenue-maximizing rate (Laffer curves are actually a factor here, unlike on labor income in politically plausible ranges). On dividends, I happen to favor corporate integration, and this is a step away from that, but I'm not convinced corporate integration is worth doing unless the distinction between debt and equity is eliminated. Debt is deductible by the company, includable by the recipien, while equity is neither deductible nor includable in the most commonly proposed integration prototype. This permits sorting of investors so that the tax-exempts hold all the debt and taxables all the equity (with some effort to minimize the second level of tax), possibly leading corporate income to be taxed on average less than once. Anyway, undoing the wrong kind of integration might be defensible even though I'm otherwise not thrilled with the direction.

On balance, not great although I suppose one shouldn't be surprised given the political context.