Let's see: Obama wants to raise the marginal tax rate on two-thirds of small business income and the lion's share of wages to a rate perhaps approaching 50 percent (when the higher individual income tax and Social Security taxable wage base is factored together).

He wants to raise the tax rate on capital gains and dividends from 15 percent to 20 percent.

He wants to "close corporate tax loopholes" and has no plan to reduce our corporate income tax rate, just barely the second highest in the OECD.

So, no, I don't think Obama's plan to raise taxes on small businesses, high income employees, corporations, and investors in stocks is a good recession-fighting stimulus.

And his Keynesian Demogrant handouts to non-taxpayers will do as much for the economy as spitting into the ocean does for the sea level.

President-elect-Obama’s twin tax policy goals of middle class relief and economic growth are admirable but here are a small suggestion and a big one to stir the pot. What does the middle class want? One thing they don’t want is to see their hard-earned savings for a rainy day, a first home, their kids’ college educations and all their retirement savings taxed and taxed several times more, which our current tax code does. “Gimme back my nest egg” is a common plea of many in the middle class. How about in the short term cutting the capital gains tax to encourage people during the stock market meltdown to buy into the market rather than to sell, thereby boosting stock values and nest eggs and restoring investor confidence?(See also www.MrCapitalGains.com. The blog name comes from a WSJ description of my “25-year quest for lower taxes onfsaving and investment.”) Once we have in place a necessary fiscal stimulus package and get our economy growing again, how about tackling one of our fundamental economic imbalances – too much consumption and not enough national saving – by switching from an income to a consumption tax base? Tax the spendthrift, whether he be Joe the Plumber, James the Wall Street financier, or Gigi in Hollywood, who spend on gas-guzzling SUVs, bragging rights for having the largest yachts ever or owning a castle on the French Rivera and instead reward – don’t tax – those who save in a college savings account, provide the capital for a new biotech cancer saving drug and underwrite an AIDS prevention documentary. “Yes, we can” address our short-term economic woes and set the stage for long term US economic growth, job creation and competitiveness.

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The President-elect’s tax plan has one big advantage compared with other proposals to stimulate the economy through tax cuts: It represents a permanent cut in taxes for a large proportion of people who pay income and payroll taxes. Most economists agree that households are much more willing to spend out of a change in their net income which they perceive to be permanent than they are to spend out of a change that will last only one or two years. Some macroeconomists claim that the tax rebate paid out to households earlier this year had only a small impact on their consumption spending. The reason for the limited effect was that consumers knew the tax cut would not last long.

If you look closely at President-elect Obama’s plan, however, it is not clear how much extra consumer spending we should expect from the particular tax cuts he proposes. In September the Brookings-Urban Institute Tax Policy Center published a summary of the presidential candidates’ tax plans [see: http://www.urban.org//UploadedPDF/411749_updated_candidates.pdf ]. About two-thirds of the permanent tax cuts proposed by President-elect Obama will continue provisions in the tax code that otherwise would have expired. Roughly one-third of the proposed tax cuts will occur because the Congress would make permanent many of the provisions of the 2001-2003 tax changes that were slated to expire in the next presidential term. Another one-third of Obama’s cuts would be the result of extending temporary provisions in the tax code that Congress has almost always extended when they were about to expire. For example, the President-elect has proposed extending and indexing a temporary provision of the tax code that prevents millions of middle-income taxpayers from paying the (higher) Alternative Minimum Tax (AMT) instead of the (lower) regular income tax. He has also proposed making permanent a research and development tax credit that Congress has routinely extended whenever it is slated to expire. Since many taxpayers were not aware the tax provisions were temporary and slated to expire in the near future, converting temporary provisions of the tax law into permanent provisions may not lift consumption above its recent level - - a level so low that it is weakening an already weak economy.

Many of the President-elect’s other tax proposals are targeted at lessening burdens on working families and families with children, especially families with below-average incomes. To the extent that these proposals put extra dollars in the paychecks of average and below-average income households, the money is likely to be spent relatively quickly. On the other hand, a couple of the proposals represent incentives for workers to set aside a bigger slice of their paychecks in a retirement account. If these new tax incentives are successful, many workers will end up with bigger retirement savings accounts but they will be spending a smaller percentage of their salaries on current consumption. This response may be good for workers’ retirement security, but it will be counterproductive for giving a short-term boost to the economy.

My assessment is that a successful stimulus package will require something in addition to the permanent tax cuts suggested by the President-elect and something in addition to a temporary tax cut. In a previous post, I argued for specific changes in unemployment benefits and food stamps and straightforward fiscal relief for state governments in the form of a temporary increase in the federal government’s share of the cost of Medicaid. I also favor targeted fiscal relief that encourages state and local governments to continue, accelerate, initiate, and expand their investments in capital investment projects – building or repairing essential public infrastructure. Since a large fraction of the nation’s construction and manufacturing industries will be idle over the next two or three years, there is a powerful argument for using those idle resources to build or fix the nation’s roads, public transportation, sewer systems, schools, and public buildings.

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Ideally, we should have a tax reform package in 2009 that provides a refundable tax break for low and middle income families immediately to stimulate the economy but then raises revenues in the outyears (beyond the recession) by raising rates on the more affluent and curbing or eliminating the numerous tax expenditures that now total close to $1 trillion a year. The entire package should lose revenues in the short-run but gain enough revenues in the long-run to contribute to lowering the deficit.

The problem with this ideal scenario is that there may not be time to get tax reform done before another stimulus package is enacted since the stimulus package needs to be put on a very fast track. And that will create enormous problems for tax reformers who will then have no sweetners to include in their package. For this reason, it may be better to keep any tax rebate that's included in the stimulus package temporary and to sell it solely as an emergency measure or "downpayment" on the middle class tax cut that Obama promised during his campaign. However, it would be a mistake in my view to decouple a permanent cut from a broader reform that actually raises revenues over the longer term. The new President should argue that he wants to provide a permanent tax cut to the middle class but only in the context of this broader reform. Otherwise, such a tax cut would be fiscally irresponsible.

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As is widely known, the 2001 and 2003 tax cuts were heavily skewed toward the top income brackets and away from lower-income American workers. I couldn't agree more with the emphasis that President-elect Obama's has placed on reversing that tilt. I would not do it solely in the name of equity, as so many Democrats do, or even in the name of maximizing the propensity to spend in a time of recession, though that also belongs on the list. I would emphasize also incentives: the importance of reducing the effective marginal tax rate on low-income workers, which currently is often far higher than on the top-bracket earners. Giving lower income workers more of an incentive to raise their earned incomes should be a major social goal.
(http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/02/08/8/)

Eliminating income taxes altogether on the lowest brackets would also serve admirably the goal of tax-simplification. I am not sure that cutting capital gains taxes for lower-income workers would serve this goal as well.

"Raising taxes on the high end" is important as one of a number of ways of seeking to reclaim some modicum of long-run fiscal responsibility, which has been utterly lost over the last 8 years. But for one thing I would not raise top marginal tax rates higher than they were during the Clinton Administration (a time of rapid growth, contrary to conservatie predictions regarding the effect of those tax rates), which is still less than half of the pre-Reagan levels.

And I could certainly see an argument for waiting to "raise" these tax rates until after the recession. In fact I could see a good argument for waiting until January 2011. In that case one could eliminate the descriptor "raise taxes," and could merely let most of current tax law take effect. Recall that under current law the Bush tax-cuts-for-the-rich -- such as the complete abolition of the estate tax in 2010 -- are set to expire in 2011. If the Obama administration lets these explicitly sunsetted tax cuts expire, the Republicans cannot legitimately accuse it of raising taxes. The Bush Administration has ever since 2001 been relying on the scheduled expiration of the tax cuts in its budget projections, the projections that claimed that the deficit would be eliminated in 2011.

Other tax issues to be addressed include fixing the AMT (a revenue loser) and establishing energy prices that take into account national security and the environment (a revenue gainer).
(http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/)

JF

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I have worked many years in formulating tax, spending, and budget proposals. These efforts include Treasury service in dealing with campaign proposals from three winning Presidential candidates and as the original organizer and Economic Coordinator of the Treasury 1984 study that led to the Tax Reform Act of 1986. One clear lesson stands out: campaign proposals differ--or at least should differ-- from Presidential proposals. The President uniquely has access to a highly qualified career staff that can guide him around pitfalls that are unknown or simply ignrored in the rush of a campaign. Does he wish a more progressive system? Help for the middle class in dealing with the economy? These are the broad types of issues on which he has run and on which he can and should set priorities.

Now as President, he can seek out the type of advice from those who can tell him how to implement those ideas in ways that best meet other principles, such as equal justice (how much less in taxes should an elderly person pay than a non-elderly person with the same income?), simplicity (what can IRS and tax filers really handle?), efficiency (for the same level and distribution of taxes, what is less likely to deter work, saving, and other useful behaviors?), and economic growth (what is the best timing of any tax change to deal with the recession, and to what extent is one type of tax cut or increase likely to provide a better stimulus?). Also, to what extent are any deficit-increasing actions going to further restrict his options down the road?

I'm not suggesting that there are simple answers to the types of questions that derive by first looking to budget and tax principles. But I can guarantee that there are almost always better answers than what comes out of a campaign.

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