Wednesday, February 25, 2009

Obama Will Raise Taxes For Every American

Obama says:

"In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2% of Americans. But let me perfectly clear, because I know you’ll hear the same old claims that rolling back these tax breaks means a massive tax increase on the American people: if your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime."

That is true only in the sense taxes won't be raised with a single dime. They will be raised a lot more than that. To some extent that will in the short term be compensated for many with tax payment reductions in the stimulus package, but they are set to expire after 2011 (and they also have problematic effects on the marginal rate of taxation).

The first example of this is that just 3 weeks ago, Obama signed legislation that will raise cigarette taxes by more than 6 dimes (62 cents to be more precise) per pack. Does Obama and his speech writers really have such bad memories that they can't remember what they did 3 weeks ago? Or do they imagine that all smokers earn more than $250,000 (whereas in reality smokers have below average income).

The second example is how Obama wants to introduce so-called "cap and trade", something which he mentioned in the speech. "Cap and trade" is just a fancy euphemism for a carbon tax. It differ from astraightforward carbon tax in some technical aspects, but it is nevertheless a carbon tax*, something which will hit a lot of Americans with a family income below $250,000.

A third thing to remember is the fact that tax increases even for the highest income earners will hit others. The claim that tax increases will only hit those that pay taxes presupposes that behavior will not be affected. That is like arguing that sales taxes and other consumption taxes will only hit merchants, and will not be detrimental to consumers. Under the more realistic assumption that productive efforts are reduced as a result of this tax increase, this will reduce the supply of goods and services and so raise prices of these goods and services and so reduce the purchasing powers of people earning less than $250,000 per year as well.

*= Some have argued that it will not be a carbon tax if the permits are given away for free. But as Greg Mankiw points out, that still makes it a carbon tax for companies that have to buy additional permits, while being at the same time a corporate subsidy for firms that can sell them. It is really no different from having a carbon tax that funds corporate subsidies.


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