Tuesday, August 19, 2008

When tax analyses argue past each other 

There are numerous analyses running around right now about the tax plans of Barack Obama and John McCain. I think many of them are talking past each other. Let's consider three different paths an analysis can take.
  1. Efficiency and distortion -- one part of tax policy concerns itself with whether the tax system is extracting a given amount of revenue at the lowest possible cost in terms of deadweight costs, rent-seeking, or otherwise gunking up the price system. (Like Phil, I watched that ethanol piece on Reason.tv and said to myself "good principles of econ clip!") Concerns about efficiency and distortion are addressed by study of the marginal tax rate, since distortion occurs at the margin. It's on this score that McCain's proposal to reduce the corporate tax rate to 25% looks good. It is not at all a statement that businesses are paying too much in taxes. Indeed, it could be that we get more tax revenue at a lower rate; neither McCain nor I am making that claim, but it's important to point out that if lowering a tax rate meant you increased tax take (even as a share of profits or GDP, because multinational corporations were shifting tax liability to lower-tax jurisdictions), the efficiency argument would still be valid. Or the higher marginal rate for earners over $250k in the Obama plan is seen by Greg Mankiw, for one, as reducing the incentives to work, save and invest. Either way, these are arguments made at the margin.
  2. Equity -- the argument that some should pay more than others is a different debate. For example, Mike Moffatt responds this morning to Paul Krugman's statement that the debate over the corporate income tax is much ado about nothing. It's not to Mike because "the U.S. corporate tax system is highly complex and distortionary". True, but that's not Krugman's argument. Take also the debate between Brill and Viard on the one side and Obama advisors Furman and Goolsbee, discussing the Obama plan for income taxes. The former point to the inefficiency and increased distortion created for some middle income familes from the Obama plan; Furman and Goolsbee focus on the fact that taxes overall would be lower. (So too the analyses from the Tax Policy Center.) By focusing on average taxes paid in the past rather than marginal rates prospectively to be paid in the future, the two groups are arguing past each other. Tyler Cowen comes closest to my point here in debating the Brill and Viard article:
    I am not saying that Obama is "raising taxes on the poor." It is about marginal rates and yes marginal rates do matter for incentives. This is a genuine problem of many indeed most anti-poverty programs...
    I'm not making the case that there is absolutely an equity-efficiency tradeoff (a la Okun), just that they are separate cases, and policy advisors and bloggers can put different weights on the outcomes of two second-best proposals.
  3. Scope of government -- the other concern can be the size of government. Many people seem to focus on how much each plan adds to the deficit (that seems to be a concern in the Tax Foundation analysis, for example). So people will want proposals that are "revenue neutral" or "deficit neutral" because the proposal is not to increase the scope of government. Increasing deficits do imply a larger scope of government for future taxpayers who must retire the debt that is created by that deficit.
If you want a sense of which argument is being made, look for the number used for the argument. Tax rates are about efficiency, tax shares are about equity, and government expenditures or debt or deficits as a share of GDP are arguments about scope of government -- this would be a simple shortcut that might help sort out who's talking about what.

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