Thursday, September 04, 2008

When Co-teachers Collide

A letter in today's Wall Street Journal:

In regard to Martin Feldstein and John B. Taylor's "John McCain Has a Tax Plan to Create Jobs" (op-ed, Sept. 2): Barack Obama is proposing large middle-class tax cuts to reward work, encourage wealth accumulation, and stimulate economic growth. John McCain is proposing little in direct tax relief for middle-income families and has proposed a health plan that would, over time, represent a significant tax increase for most American families.

You don't have to take my word for it. The National Review editorial board recently complained that Sen. McCain's plan "offers very little in the way of direct benefits to Americans in the middle of the income scale." Rea Hederman, senior policy analyst at the conservative Heritage Foundation praised Sen. Obama's tax plan as "a great step in the right direction," and explained that "the middle class would likely pay less under Mr. Obama's plan than Mr. McCain's." And even the conservative Tax Foundation confirmed as "correct" that 101 million tax filers would get nothing from Sen. McCain's middle-class tax cuts.

Faced with these facts, Martin Feldstein and John Taylor are forced to misrepresent the Obama and McCain plans. They say Sen. Obama is proposing only a one-time $1000 rebate. In fact, Mr. Obama has proposed a permanent $500 per worker/$1000 per two-earner-family tax credit to offset the payroll tax. They say that under Sen. McCain's health-insurance plan "most taxpayers will also pay less in tax." In fact, Mr. McCain's plan introduces a new tax on employer-provided health insurance benefits together with a new tax credit that does not rise with the cost of health insurance. As health-care expenditures rise faster than overall inflation, the tax increase in his plan rises much more quickly than the value of Mr. McCain's health-insurance tax credits -- resulting in a net tax increase for tens of millions of working families.

Jeffrey Liebman

Cambridge, Mass.

Mr. Liebman is an economic adviser to Sen. Obama and Professor of Public Policy at Harvard University where he co-teaches "American Economic Policy" with Martin Feldstein.

Update: Rea Hederman emails me a clarification:

I saw this morning that you posted a letter by Dr. Liebman on your blog (to which I subscribe). The letter does not accurately reflect my comments on the Obama tax plan. Dr. Liebman has sliced my quotes well out of context. If you read the full article in the NY Sun (August 15) you will see that my quote--'great step in the right direction'--refers to reductions in the tax rates for capital gains and dividends to 20%, which is far lower than the 25% or 28% that seemed to be contained in Senator Obama's tax plan at beginning of the summer. Heritage and the Tax Policy Center both started our initial assessments of Senator Obama's tax plan with the capital gains and dividends tax rate being raised to 25%. I do think it's a step in the right direction that the Obama campaign has decided not to raise the cost of capital by as much as they planned in the beginning of the summer. But, as I noted later, it would be even better not raise taxes on capital at all.

Dr. Liebman also did not include my comments that Senator Obama is reducing middle class taxes in the wrong way. He complicates the tax code with messy tax credits that will do a host of harm to growth and fairness in the tax code.

Update 2: A rejoinder from Jeff:


Three points regarding Mr. Hederman's email.

First, I note with interest that he did not disavow his statement that the middle class would likely pay less taxes under Mr. Obama's tax plan than under Mr. McCain's. The simple fact is that Heritage has now confirmed what the Tax Policy Center and others have said – Obama has larger middle class tax cuts than McCain. Of course Heritage has different ideas about how taxes should be cut, but that wasn't the Feldstein-Taylor argument. They were disputing the relative comparisons of the size of the tax cut. So I do not think I was unfair to Mr. Hederman in using him as a reference on this point.

Second, I think his beef about being misquoted belongs with the NY Sun, not with me. Look at the subheadline of the Sun piece "Heritage Hails 'Great Step in the Right Direction'" and at the second paragraph "And even some conservatives are praising him for it." It is clear that the Sun reporter concluded Mr. Hederman was enthusiastic about the overall Obama tax plan, not just a limited component of it. I obviously wasn't a party to that conversation, so I can't tell if the reporter treated Mr. Hederman fairly. But as far as I am aware, there was no letter to the Sun from Heritage objecting to this portrayal.

Third, on capital taxes Mr. Hederman wants to reframe Obama's "great step in the right direction" as a less egregious step in the wrong direction. This is simply a question of what baseline is being used. In your blog, you have often used the CBO "current law" baseline (see here). This is a baseline under which much of the tax code reverts to how it was at the end of the Clinton years. Under this standard, what Obama is proposing is a big tax cut for dividends (from 39.6 to 20 in the top bracket) and keeps capital gains the same or lower as under the baseline. So under your blog's preferred baseline, it seems like "great step in the right direction" is the correct interpretation (I personally am not a fan of the CBO baseline, but what is most important is being consistent in which baseline one uses).

And thanks for helping to build interest in Econ 1420 "American Economic Policy" for the spring. Marty and I do four joint appearances in that class and try hard to help students see why we disagree and not just that we disagree (and, perhaps more importantly, that there is much we agree on).


Thanks, Jeff. (Just for the record: I don't think this blog has taken a general position on a "preferred baseline"--each baseline gives information about a somewhat different counterfactual. That is not a major issue, in my view, but I did want to clarify.)