rssNeither Candidate’s Tax Plan ‘Pro-Growth’
Friday, October 24, 2008 at 2:49 pm
- 4 Comments
During an interview with MSNBC’s Andrea Mitchell a short time ago, Sen. John McCain’s senior economic adviser, Doug Holtz-Eakin, said a nonpartisan tax analysis found McCain’s tax plan would better promote economic growth than that of Sen. Barack Obama.
“You go to the independent, quote, Tax Policy Center, a group I know very well, and I encourage people to go there. They’ll say, ‘John McCain’s [tax] plan is better for growth.’ What does this economy need? It needs to grow.”
A look at the Tax Policy Center’s analysis (PDF) of the two candidates’ tax plans, last updated Sept. 12, reveals that Hotz-Eakin’s claim appears to rest on this passage:
By many measures, the distribution of income has become much less equal over the past 20 years, and the recent tax cuts have exacerbated that trend. Since 2001, inequality in the distribution of after-tax income has grown faster than inequality in the distribution of pretax income. The Obama proposal tries to buck that trend by making the tax system much more progressive (as detailed in the next section). However, it does so at the cost of higher marginal tax rates and additional complexity.
Many provisions in Obama’s plan share a common shortcoming in their use of phaseouts to limit their benefits and constrain revenue costs. Phaseouts reduce tax benefits over a range of income and thus increase the effective marginal tax rate on taxpayers in that range. To the extent that higher tax rates affect behavior — inducing people to work fewer hours or save and invest less — the phaseouts adversely affect economic activity and growth. Furthermore, phaseouts add significant complexity to the tax code, making it more difficult for taxpayers to determine how much they owe and harder to understand how the tax system works. [Emphasis added]
However, the report’s executive summary (PDF), last updated Sept. 15, suggests neither plan would do much to promote economic growth:
Both John McCain and Barack Obama have proposed tax plans that would substantially increase the national debt over the next ten years, according to a newly updated analysis by the non-partisan Tax Policy Center. Neither candidate’s plan would significantly increase economic growth unless offset by spending cuts or tax increases that the campaigns have not specified.
Holtz-Eakin’s claim may be technically true, but according to the Tax Policy Center, it is insignificant.
4 Comments
Comment posted October 24, 2008 @ 1:05 pm
Actually, it may NOT be technically true. First, the sentence stating “To the extent that higher tax rates affect behavior — inducing people to work fewer hours or save and invest less — the phaseouts adversely affect economic activity and growth” and spinning this to mean that Obama's plan is inferior for growth is extremely misleading. Obama's raising the tax rate on the upper tax brackets on a net basis may be more than compensated for with the much more generous tax cut he offers to the lower tax brackets relative to McCain.
Second… the sentence this signs off with states that these plans must be accompanied by spending cuts or tax increases that the campaigns have not specified. That contradicts the notion that economic growth cannot occur without a long term tax increase somewhere else.
Finally, I would argue that tax cuts to the lower tax brackets are MORE pro-growth than tax cuts to higher tax brackets. They spend more of their disposable income increasing demand and compelling businesses to expand. The argument that capitalizing the wealthy who will then invest in businesses compelling them to expand doesn't historically work because businesses are wisely going to respond to demand shifts when they expand and contract… not capital. If it doesn't make sense to expand, they would just stick that extra capital into accounts for interest/liquidity.
Comment posted October 24, 2008 @ 8:05 pm
Actually, it may NOT be technically true. First, the sentence stating “To the extent that higher tax rates affect behavior — inducing people to work fewer hours or save and invest less — the phaseouts adversely affect economic activity and growth” and spinning this to mean that Obama's plan is inferior for growth is extremely misleading. Obama's raising the tax rate on the upper tax brackets on a net basis may be more than compensated for with the much more generous tax cut he offers to the lower tax brackets relative to McCain.
Second… the sentence this signs off with states that these plans must be accompanied by spending cuts or tax increases that the campaigns have not specified. That contradicts the notion that economic growth cannot occur without a long term tax increase somewhere else.
Finally, I would argue that tax cuts to the lower tax brackets are MORE pro-growth than tax cuts to higher tax brackets. They spend more of their disposable income increasing demand and compelling businesses to expand. The argument that capitalizing the wealthy who will then invest in businesses compelling them to expand doesn't historically work because businesses are wisely going to respond to demand shifts when they expand and contract… not capital. If it doesn't make sense to expand, they would just stick that extra capital into accounts for interest/liquidity.
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