Obama's Tax Plan: The Politics And Policy

Barack Obama chose a summer, 2005 commencement address at Knox College in Galesburg, Illinois, to voice what his advisers and friends say was his most ambitious attempt to sketch out the Obama political brand. At the time, Obama had no intention of running for president. But echoes of that speech can be found in just about every public policy address Obama delivers, including today's speech on middle class tax relief.

In 2005, Obama put “Social Darwinism -- every man and woman for him or herself” in tension with “our sense of mutual self-regard for each other, the idea that everybody has a stake in the country, that we're all in it together and everybody's got a shot at opportunity - that has produced our unrivaled political stability.”

He will sell his tax cut -- and the taxes that he raises to fund it -- by appealing to the same "mutual self-regard" that animates the American political religion.

Obama has been deeply influenced by academic and popular economic literature on the great shift of material risk to the lower middle class at the same time as the gap between the wealthy and the working class expands. The culprits, in terms of the federal tax code, are the large number of itemized deductions, the mortgage deduction, and the entrenched system of corporate welfare that both political parties sustain. The complexity of the tax code also burdens the poor; the rich can hire good accountants to find them loopholes, while poorer folks.. well, this isn't an economic blog, so I'll stop.

Obama does not eliminate the home mortgage deduction, nor does he do away with all itemized deductions. He did, however, take a step in that direction. Folks who don't itemize their deductions would get a home-owner's tax credit. And he would refund a portion of the payroll tax, amounting to a tax cut of between $500 and $1000 for almost everyone.

A substantive analysis eludes my mind, so I asked my colleague Megan McArdle for her thoughts. She'll post on this later, but for now:

1) This will be very expensive
2) Some of it is a blatant giveaway to those who don't need it; seniors already do *very* well out of the US government.
3) The tax simplification thing will not work. Most people itemize because they have to. It directly wars with his plan for a refundable mortgage credit.
4) The refundable tax credit for working families to "rebate" their tax credits is silly; they're already rebated to the poor via the EITC. Expanding the EITC would make sense, but not this silly giveaway to the middle class.
5) The AARP may go nuts over the payroll tax refund; they hate any implication that it's a tax, not a contribution. Presumably the lowered taxes on seniors are supposed to buy their support.
6) Overall, not a good plan. There are better, more economically efficient ways to achieve what he is proposing, and there's not all that much money to be clawed back by repealing tax cuts on the over $250K set.

So that's one verdict. There will be many others. By way of clarification, here is how Obama's campaign describes the mechanism of payment: "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."

Details are not yet available.