From the Heritage Foundation. If you live in Minnesota and are in the top bracket, put yourself above Denmark if Obama wins. It's not likely to do much for labor supply, either.

Labels: economics, Obama

Glenn Kessler in the WaPo, June 13,

Sen. Barack Obama said Friday that as president he would impose a Social Security tax increase on people making more than $250,000 a year as part of an effort to extend the program's solvency without cutting benefits or raising the retirement age.

Currently, taxes funding Social Security end once a worker reaches $102,000 in earnings, a ceiling that is indexed to inflation. Workers and employees share the cost, with each contributing 6.2 percent. Under Obama's plan, which the presumptive Democratic nominee outlined at a retirement community here, there would be a "doughnut hole" on earnings between $102,000 and $250,000 where no additional taxes are paid.

Obama has spoken of such a concept before, but Friday marked the first time he had set a threshold for imposing new taxes. Obama was vague on whether that figure would apply only to payroll income.

Video of speech here. This isn't particularly new; he pitched the doughnut plan at the Pennsylvania debate with Hillary in April. Larry Lindsey criticized this proposal in the Wall Street Journal last Friday as being anti-FDR as was as a sharp increase in taxes on the self-employed.

A high-income entrepreneur would see his or her federal marginal tax rate rise to 53% from 37.7% under Sen. Obama's tax plan. He proposes a 4.6 percentage point hike in the personal income tax rate, a loss of some itemized deductions, and a 12.4 percentage point hike in the Social Security payroll tax. This would take a successful entrepreneur's effective marginal tax rate higher than what it was under Jimmy Carter or Richard Nixon, when the maximum tax on an entrepreneur was 50%.

That's enough for run-and-hide, the prevailing tactic of the Obama campaign when its proposals get draw flak.

Obama economic advisor Jason Furman, yesterday in a letter to the WSJ:

Mr. Obama has stated that he would like to extend solvency while protecting middle-class families and asking those making over $250,000 to pay their fair share. As president, he would work with Congress on a bipartisan basis to design the details of such a change, including the tax rate, how it is phased in over time, the linkage between these tax payments and benefits and other critical design elements of this plan. He has not proposed a 12.4-percentage point tax increase on earnings above $250,000.

Bump goes the bus, claiming another victim under its wheels.

Labels: economics, Obama, politics

Mark Perry titles his post "It's an 'Educated-Take-All' Economy", with a graph showing the returns to education for median family income. Quoting a news article first (in italics):

Barack Obama said that he was trying to put together tax and spending policies that dealt with two challenges. One is the competition from rapidly growing developing countries, like India and China. The other: the U.S. becoming what he called a "winner-take-all" economy, where the gains from economic growth skew heavily toward the wealthy.

...Wouldn't one way for Obama to solve this "problem" be to have the government shut down all American colleges and universities, eliminate all federal funding for higher education, or have the government put limits on the number of students attending college?

There is rising income inequality, but the inequality is due to the increasing gains to education over time. It's not so much that the "rich are getting richer and the poor are getting poorer," as much as it's "the college-educated are getting richer in an Information Age Global Economy, and the high school dropouts are staying the same or getting poorer."

So is it possible to use the tax code to correct for income inequality that is the result of educational differences? And is it desirable? When we've debated the creation of public funds for higher education financial aid through scholarships, one issue was the tax rate on human capital formation. Should the tax system be changed to raise the tax rate on human capital formation through education, as it appears a President Obama would do? Note that his plan includes higher marginal rates on the wealthy compared to McCain, as much of the revenue going to lower-income households are in the form of credits rather than rate cuts. More highly progressive systems are, in fact, a means of taxing human capital. Maybe he'd be better off just taxing height.

Larry Lindsay notes this morning that the combined effects of the Obama tax proposals would move the entrepreneur earning more than $250,000 per year would see a rise in his marginal tax rate to 53% from 37.7%. Obama thinks the entrepreneur will simply take it in the shorts. Lindsay says, not quite:

One of the lessons from the disastrous economics of the 1970s and the subsequent Reagan tax cuts is that everyone – particularly entrepreneurs – responds to incentives. If you take away 10% of a high earner's after-tax income at the margin, he will cut his taxable income by at least 4%. At the margin, this taxpayer now takes home 62.3% of his earnings, a figure that will drop to 47% under the Obama plan. According to a widely accepted economics rule of thumb, the entrepreneur's taxable profit would drop by 11.2%.

Now consider how the Obama plan would affect the taxes paid by such an entrepreneur with a taxable profit from his business of $500,000. Under current law, he would pay $27,148 in Social Security and Medicare taxes, plus $142,969 in personal income taxes, for a total of $170,117. If the taxpayer did not change his behavior at all, under the Obama plan he would face a $31,000 Social Security tax hike and a $11,494 hike in his personal taxes – or a 25% tax hike. But, if the taxpayer responds as the economic models predict, his taxable profit would drop to $444,000. His Social Security and Medicare tax bill would still soar to $51,580. But his income taxes, even with a higher tax rate, would drop to $132,882 for a total of $184,462.

In other words, Sen. Obama is planning on a combined series of tax hikes to produce $42,000 in tax revenue, but consensus economic modeling suggests the government's net take would rise only $14,000.

See also J.T. Young from earlier this week. But even that is a short-run analysis. What is the incentive for someone to study for the higher-income majors in school if we raise the rate of taxation on human capital formation by 25%? With smaller cohorts of new workers coming into the labor force in the future, each worker will need to be more productive to fund current Social Security and Medicare liabilities. The Obama tax plan stifles the incentive to be educated in fields that are highly productive. People don't luck into MBAs and law degrees or medical research (though perhaps Mrs. Obama thinks so) ; they do so in pursuit of their dreams, of which Mr. Obama would like 53%.

Labels: economics, Obama, taxes

While I usually will ignore comedians' political views (this is also true for sportswriters -- if some sports columnist wants to use a political metaphor somewhere in a story, who it skewers doesn't affect my enjoyment or not of the column), there are times that try men's happy souls. Take for example this blather from Lewis Black, who has been employed as a spokesman at minimum for the SEIU, one of your more militant trade unions in America. (Notice the "stop corporate greed" wrapped in a fist; the image does not beget visions of dialog.) The video attacks Henry Kravis and private equity firms that buy out companies.

Apparently Mr. Black does not know that KKR's financiers are often pension funds, as Fortune magazine pointed out a few years ago:

From the beginning, KKR's key investors-bound to the firm with almost religious devotion-have been the investment arms of two states, Washington and Oregon. Both figure their annual returns from KKR over the years to have exceeded 16%, which they think both entirely satisfactory and a reason for them to dig deeply when KKR periodically brings its collection plate around. Their latest act of fealty occurred early in this decade as KKR worked to raise what came to be called its Millennium fund and ran into two problems: first, resistance from investors because of KKR's recent spotty record, and second, the fierce blow of 9/11. In the end Oregon stepped in with an unprecedented investment of $1 billion, and Washington topped that with $1.5 billion. So of the $6 billion fund KKR raised, two investors amazingly account for just over 40% of its dollars. No problem, says Joseph Dear, executive director of Washington's investment board: "KKR has a demonstrated capacity to show good returns."

Those investment returns go to government retirees, many of whom worked for AFSCME or some other union. Funny how Mr. Black missed that one. They've done it for private firms they've bought as well.

As WSJ's Wealth Report notes, the Democrats seem convinced that crusading against the "rich" is profitable for them. How far will Team Obama push this? In today's Political Diary, Stephen Moore writes that if you make "the rich" just those families earning over $250,000, the revenue gain of letting the Bush tax cuts expire on them is only $40 billion a year, about 10% of what the Obama proposals would cost. The main source of revenue would be to let the cap on Social Security taxes move up sharply on those earning between $100k-$200k. Many of those family members watch Comedy Central ... or used to.

Labels: class warfare, economics, Obama, politics

I've not commented on the Obama craze the past few months. I'm happy to let the Democrats duke it out among themselves. But, this San Francisco fundraiser displays such an incredible example of the hypocrisy of what the Democrat Party says it is that I decided to post.

The Democrats bill themselves as the party of the working man. I've even seen the old bumper sticker with words to the effect: I can't afford to be a Republican. I've got news for you - the billionaires are overwhelmingly Democrat - you can't afford to be a Democrat.

Most media moguls, Democrats;
Dot-com mega-millionaires and billionaires, Democrats;
Stock market honchos, Democrats.

These people, most of whom earned their mega-fortunes, have now decided they are smarter and better than the rest of us. They have their fundraisers at multi-million dollar mansions with their mega-rich friends, and agree with the condescending, snide remarks made about the rest of us peons.

What made America great was our environment that fostered, encouraged, and supported new ideas as well as the knowledge that with enough intelligence, hard work, and sometimes a few breaks, people could create and earn more than they ever dreamed. Most of these incredibly rich Democrats earned their money in our free-market system.

What happened to their attitude once they became so wealthy that money no longer meant anything to them? Did they put their efforts to encouraging others to repeat their successes? No.

Obama's behavior is that of a privately schooled, east coast educated elitist. He was at home with the San Francisco mega-money crowd. He and his super rich supporters do not understand that we Americans are capable of making our own decisions and we don't want others telling us what to do or how to think. This elitist attitude may well have cost him Pennsylvania tonight.

I don't want their money, I don't want their houses, and I surely don't want their arrogant, elitist attitude. What I do want is the continued opportunity to support the nation that gives people a real chance.

There will always be elitists - it's just that too many of today's elite Americans are far too socialistic minded. They are totally out of touch with the very people who buy their products and made them wealthy beyond belief.

Labels: Democrats, Obama

Joshua Sharf comments on an Obama plan to give $4000 tax credits usable for tuition (he reports it as something he heard on TV; here's a transcript from the Nightly Business Report that mentions the plan, and here's the American Opportunity Tax Credit from his website):

I'd give it about half an hour before every college in the country raised tuition by about, oh $4000. Repeat after me: subsidies either raise prices or create surpluses.

The first part is mostly true -- a $4000 subsidy increases the demand for higher education and pushes prices up. Now if we have slack demand for seats in higher ed it won't be a $4000 rise in prices, as the quantity of seats supplied will respond to higher prices and fulfill some of that new demand. As always, a question of elasticity, this time on the supply side, and in the short run most goods are fairly inelastic. So price is going to absorb most of the price.

What happens if it doesn't? With all those new students subsidized into attending college rather than entering the labor force, the only way to keep students from queuing up for scarce seats is to raise price. Now, it might not be taken in tuition -- I could be fussier about who I admit, the university choosing better students over more money. If I do nothing, applications rise for the same number of admissions, leading to a lower acceptance rate. That should be seen as a shortage, not a surplus.

Joshua says that he heard there would be a service requirement to the rebate. His paraphrase of the speech says "We're going to invest in you. But in return (There's always an, "in return." -ed.), we're going to require you to invest in us by volunteering in the Peace Corps, the VA..." I did not see any references to a service requirement in the Obama materials I viewed. But let's assume Joshua heard this right. Who's going to take that deal? Who would trade a two-year commitment to the Peace Corps for $4000 rebates (for how long? One year? Two? Four? Six?) I would say you can forget anyone from business programs, or many pre-professional programs. It doesn't cash flow ($4ooo over the first four years in; two years entry level salary in your field minus about $6000 "readjustment allowance" out -- yes, you get a little money for meals and so on, so suppose you call it another $6000 a year, is this math working for you?) Great deal, however, for the various people getting degrees in, say, the Department of the 3.7 GPA.

Again, not sure that's part of the Obama plan, but if it is, it's a double whammy.

Labels: economics, higher education, Obama