Mankiw Uses Game Theory to Support Obama’s Tax Policy

Mankiw with an insightful piece in today’s NYT. He begins by arguing eloquently for lower taxes on corporate dividends. I couldn’t agree more.

But the interesting bit is that essentially, Mankiw thinks that McCain’s tax plan will never be implemented, so it’s not a real plan. Therefore, electing McCain will ensure that the Bush tax cuts expire in 2010 and we go back to the pre-2000 tax regime. Obama’s plan, on the other hand, dials back some, but not all, of the Bush tax cuts. Therefore, his presidency actually stands a higher likelihood of lower taxes than McCain’s.

I like the logic.

Key excerpts below:

Four years later, however, Senator Obama enters the picture with, apparently, a different point of view. He has not been coy about wanting to use the tax code to redistribute income more aggressively. He has proposed modest tax cuts (about $1,000) for numerous middle-class Americans, cuts to be financed by much higher taxes on the richest few percent of the population. When all of Senator Obama’s proposed tax increases on the rich are added up, the top marginal rate on wage income would be nearly 50 percent.

But for dividend income, Senator Obama has proposed only a modest increase in the top tax rate, to 20 percent from 15 percent. That is, the personal income tax would continue to tax dividends at a far lower rate than ordinary income. This decision must surprise many of his Congressional supporters. But it should be making President Bush smile.

In light of Senator Obama’s stand, the politics of dividend taxation may take some surprising twists. Senator John McCain wants to maintain the current tax rate of 15 percent on dividends (while cutting the corporate tax), but it is a good bet that if Senator McCain is elected president, while Congress remains Democratic, Congress won’t give the Republican president what he wants. They would instead let the Bush tax cuts expire, returning the dividend tax for high-income taxpayers to about 40 percent.

By contrast, if Mr. Obama is elected, Congressional Democrats will be less likely to balk at his proposed 20 percent dividend tax rate and thus embarrass the new president from their own party.

Credit is Overdue for Subprime Mortgage Lending

A blast from the past from the Dallas Fed. This 1998 article from the Dallas Fed is full of fun little tidbits. But it’s a useful piece of history, as we think about the right way to regulate lending practices going forward.

In case you ever feel stupid for missing the massive crisis presented by subprime lending and the disconnect between risk and return that enabled it to flourish, just take a quick read through the Dallas Fed’s conclusion in 1998:

The use of modern marketing tools and celebrity spokespeople has contributed to increasing consumer awareness of subrpime mortgage lenders and their products. Subprime customers are neither limited to a single lender nor compelled to settle for the first lender that will provide credit. Increased visibility and competition have given the subprime borrower the option of shopping for a lower rate and receiving a higher level of customer service. These changes have allowed many subprime mortgage borrowers the opportunity to gain credit that might not have been available before the recent expansion of the subprime market, obtain a more competitive interest rate and improve their credit history by successfully meeting the terms of the loan.

In addition, technological advances have begun to provide lenders with automated underwriting and scoring tools that, although new to the subprime sector, may help in pricing loans and predicting defaults. These advances, combined with reactions to changes in economic conditions, may represent the beginning of a financial revolution that will create a much broader and more unified mortgage lending industry. In this respect, the subprime market provides another example of our free enterprise system’s “democracy of consumption”  with respect to financial services as well as physical goods.

Marty comes out in favor of McCain’s tax plan

The tax debate continues. Not a lot of new information from this recent OpEd from the WSJ, but I like Marty’s perspective (I have soft spot for my former Ec10 teacher). His basic argument is as follows:

John McCain’s tax policies are designed to create jobs, increase wages and allow all Americans — especially those in the hard-pressed middle class — to keep more of what they earn. His plan achieves these goals in three important ways.

First, he proposes a package of tax incentives that will create jobs and raise earnings by inducing firms to invest more in the U.S. Second, he is strongly committed to blocking any increase in tax rates while doubling the personal exemptions for families with children, which will reduce the tax burden on working Americans. Third, he proposes a new, refundable tax credit that will increase health-care coverage, reduce the cost of health care, and provide more funds for families and individuals to purchase health care.

None of this is really new, although a bit uneven for a guy who admits that Social Security is broken and generally has good deficit fighting credentials. However, I found particularly interesting the argument in favor of McCain’s healthcare tax rebate. I LOVE the idea that we might be able to separate our employement from our healthcare insurance — I believe this is one of the largest structural problems in America’s labor markets and provides a significant smokescreen behind which healthcare costs increase astronomically each year, unbeknownst to their consumers or their providers. See Marty’s analysis below:

Mr. McCain’s overall tax policy will also expand health-insurance coverage, and make health care more efficient. Most taxpayers will also pay less in tax. Here’s how it will work. His plan includes a refundable tax credit of $2,500 for single individuals and $5,000 for couples, if they receive a qualifying health-care policy from an employer (one that includes adequate coverage against large medical bills), or buy a qualifying policy on their own. The credit will replace the current tax rule, which excludes employer payments for health insurance from employees’ taxable incomes.

This tax credit will be available to everyone, including the self-employed and the employees of businesses that do not provide health insurance. Thus it will lead to a major expansion of health-insurance coverage. The tax credit will of course be available to people who are between jobs, or have retired before they’re eligible for Medicare.

Since any part of the credit not used to pay for insurance could be invested in a health savings account, individuals will have an incentive to choose less costly health-insurance policies. This will improve the efficiency of health care, to everyone’s benefit.

Importantly, the tax credit will be a clear gain for most employees. Consider a married taxpayer whose employer now pays $10,000 for a health-insurance policy. Ending the exclusion will raise that individual’s taxable income by $10,000 — but the $5,000 tax credit will exceed the extra tax liability whether the marginal tax rate that individual pays is 10% or 35% or anywhere in between. Indeed, the lower the taxpayer’s income, the more of the credit that will be available to pay for health care that’s not reimbursed by insurance.

The devil is, of course, in implementation, and this tax policy has a chance of being a serious bear. But if we could implement it smoothly…. wow, that would be awesome. Imagine if you actually cared what your health insurance cost. Or your eye exams.

Dueling Visions — Comparing Obama’s and McCain’s tax plans

Great piece in Barron’s last week comparing the tax plans of McCain and Obama. I’ve blogged about this before, but it’s interesting to watch the debate unfold.

The piece is not even-handed — after all, you can’t expect Barron’s to support a Democratic candidate — but they do raise some good points about the Obama plan. It seems that there is real debate about what the right tax policy is for the economy today (i.e., in the midst of a downturn in the business cycle). Barron’s comparison looks something like this:

Key differences are the fact that Obama increases the progressivity of the tax code — i.e., the differential in tax rates between high earners and low earners. McCain basically preserves the Bush system and goes one step further, reducing the corporate tax rate from 35% to 25% (a move that I love, in the long-term).

A second crucial difference is the revene generating impact from the different plans.

Obama’s tax plan, at least in the original version, would generate $131 billion a year in new revenue for the government, according to the Tax Policy Center, a joint operation of the Brookings Institution and the Urban Institute in Washington. His proposal to make the wealthiest taxpayers pay higher Social Security taxes than everyone else could net Uncle Sam another $40 billion a year. He’s recently had second thoughts about this proposal and said that he might delay its implementation to 2018, way beyond his term.

Over all, he would raise $800 billion more over 10 years than the government would if the Bush tax cuts were made permanent, according to the Tax Policy Center. McCain’s plan, which keeps all the Bush cuts and trims corporate taxes to 25% from 35%, would cut revenue by $600 billion.

IN short, there is something to recommend in both plans. McCain’s has more of what I feel is the long-term approach to balancing growth and a fair tax code — maintaining low taxes on capital gains and dividends and increasing America’s corporate competitiveness through a lower corporate tax code (as an international investor, I can assure you this is a bigger problem than people admit). However, his plan gets nowhere close to balancing the budget, and he would need a massive machete to cut enough spending to get us back into fiscal balance.

Obama’s plan is not as dramatically bad as conservative bastions such as the WSJ and Barron’s decry. However, his plan to increase capital gains tax and in particular, expand Social Security taxes, seem particularly off the mark to me. Moreover, I question whether a Democratic president with one of the largest Democratic majorities in Congress in recent history can be trusted to use his new tax revenues wisely — i.e., to pay down the deficit and invest in national infrastructure and other public goods — rather than squander these new revenues on the types of projects that seem to occupy same-party Presidents and Congresses — i.e., grand social engineering experiments, bridges to next-to-nowhere, and an expansion of government’s involvement in private citizen’s lives.

Since I think Obama is going to win, my hope is that his intellectual curiosity and flat-out reasonableness will trump this dynamic. One can only wait and see…..