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Obama Compromises On Taxes -- With Himself

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A couple weeks ago, when Barack Obama filled in some of the details of his economic plan -- specifically his tax plan -- conservatives were pleased. The presumptive Democratic nominee made it official and put it in writing: he would raise taxes on individuals making over $200,000, and couples making over $250,000 --nobody else would find themselves in a higher tax bracket. Those people would also pay higher taxes on capital gains and dividends. (Visit Inc.com's Entrepreneur's Election Guide for a detailed analysis of the candidates' tax plans, and other issues important to small business -- that's where I've been for the last two weeks, anyway.)

So why were conservatives so pleased? Because up until that time, the Obama campaign spoke informally of raising capital gains and dividends on the rich to perhaps as high as 28 percent. But in the plan published August 14th, the campaign settled on just 20 percent. The much lower increase was practically a boon. An analyst at the Heritage Foundation, Rea Hederman, called it "a great step in the right direction" (pun possibly intended). Conservative commentator Larry Kudlow gushed, "Team Obama is moving toward the supply-side." (Twenty percent, as the campaign itself notes, "is almost a third lower than the rate that President Reagan signed into law in 1986.") To be sure, Kudlow still saw a great deal to find fault with in the Obama plan as a whole, and Hederman later clarified his view: Obama's tax plan "takes one step forward, two steps back."

I don't love Obama's accommodationist approach, but it would appear to fit a pattern, made plain in a smart article in Sunday's New York Times magazine by economics writer David Leonhardt. It's hardly just, or even mostly, a political calculation. In an analysis cleverly titled "How Obama Reconciles Dueling Views on Economy," Leonhardt concludes that while teaching law at the University of Chicago, Obama absorbed much of Milton Friedman's perspective on the virtue of free markets -- enough, at least, to make him a pragmatist.

When it comes to economic matters, Obama is hard to place on the ideological spectrum. On the one hand, Obama places great value on empirical data, which tends to place him in the company of economists, people who tend to believe in the power of markets. (Says Nobel Prize-winning University of Chicago economist James Heckman, "I've never worked with a campaign that was more interested in what the research shows.") This, in turn, influences how Obama defines the solution. "His policies," writes Leonhardt, "often involve setting up a government program to address a market failure but then trying to harness the power of the market within that program." A couple obvious examples: climate change, where Obama's cap-and-trade policy would auction off all of the permits for emitting greenhouse gasses rather than rely on Congress to create a formula for giving them, and health care, where Obama would put in place a program including regulation for insurers and subsidies for consumers, and then, rather than force people to buy insurance, rely on "a market of individuals to make its own decision." As Obama himself put it, "The market is the best mechanism ever invented for efficiently allocating resources to maximize production. And I also think that there is a connection between the freedom of the marketplace and freedom more generally. But there are certain things the market doesn't automatically do."

One the other hand, Leonhardt concludes that Obama stands to the left of the party when it comes to tax policy, which he would make much more progressive. According to Leonhardt, tax rates have fallen much faster for the wealthy than for everyone else. Obama would redress that partly by raising taxes on a lot of Inc. readers, of course, but also by lowering taxes on a lot of other Inc. readers. One way he would do this is a tax credit against payroll taxes, which according to Leonhardt takes "the biggest bite out of most families' annual tax bill." Obama would give most families a credit to offset those payroll taxes. Secondly, Obama's portfolio of tax credits (the payroll offset is just one of several) would be refundable, meaning that low-income people could take full advantage of them. Obama never talks about it so explicitly, but the program here is to address income inequality without intrusive government intervention in the market place. He's not about to re-regulate the economy to make it more equitable, but he's not going to let the tax code continue to aggravate the inequality.

None of this exactly explains why Obama has moderated his stance on capital gains. Obama probably figures he doesn't want to throw the baby out with bath water. From what I understand, though, the data on whether low capital gains taxes encourages investment is sketchy and best, and subject to dispute. And we do know that when there's a disparity between income and capital gains rates, the wealthy are very good at figuring out how to characterize their income as capital gains, much as hedge fund managers do with the carry.

Still, it's a good piece, and the online version is studded with links, in case you want to explore further. And it opens with startling facts that raise what I think are profound questions for our time:

1) Since 2000, the economy has grown at a slow but real pace. (Roughly 15 percent from 2000 to 2006, while per capita GDP grew at nine percent.)

2) But median household income has actually fallen by two percent -- for most people, Leonhardt writes, economic growth is a "theoretical concept" rather than an improved standard of living.

My questions:

1) Is that bad?

2) If so, what should we do about it? Clearly tax cuts haven't solved that problem.

We know Obama's answer. I want to know what conservatives think. When I find out, I'll let you know. Or you could tell me.

Last updated: Aug 25, 2008




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