The Obama Tax Plan(Or: Ted Frank's What's the Matter with Manhattan?)

[Ed. note: Ted Frank’s posts analyzing presidential candidate Barack Obama’s tax plan, available here and here, were some of the most popular in ATL history. They generated over 900 comments and thousands of pageviews. Because there have been some developments on this front since February, when Ted Frank first issued his analysis, we requested an update; he kindly obliged.]
Above the Law’s Fearless Leader David Lat asked me to update my earlier posts on Obama’s tax plan. As you recall, Obama made a series of promises of “fixing” the tax code, mostly on the backs of investors and the upper middle-class — like Biglaw associates.
I ran a spreadsheet that showed that, with reasonable assumptions, those tax increases would have the same effect on associate after-tax income as a New York law firm cutting salaries by $34,000, but permitted one to change the assumptions if you disagreed with the assumptions I made. I made no endorsements, noting that, Thomas “no relation” Frank notwithstanding, taxes and economic issues were not the only reason to vote for a presidential candidate. (Still, commenters’ reactions can best be described by Tyler Cowen’s description of “Obama insecurity“: “For some people no comment on Obama, other than the purely laudatory, is anything other than a hackish right-wing attempt to forge an alliance of lies with Karl Rove and his ilk.”)
Since then, Obama’s two top economic advisors have posted a Wall Street Journal editorial and a website giving somewhat more detail to the Obama tax plan. David asked me to update my post.
1. The most notable change is Obama’s social security tax plan. Recall that his original promise was to simply lift the cap, changing the system from a pay-in to income-redistribution — something that would have cost law firm associates thousands or tens of thousands and raised marginal tax rates to nearly 60%. When Hillary Clinton started hitting him hard about it, he backed off his original plan to make social security taxes uniform and said he might (but might not) add a “doughnut-hole” between $97,000 and $150,000 or $200,000 or $250,000.
Now that Obama has clinched the nomination and is pretending to be a centrist for the general election, after the Wall Street Journal hit him hard about it, Obama pushed everything he promised in the primaries overboard. First, he said he would raise taxes not the full 12.4%, but just “2 to 4%” — so much for making Warren Buffett pay the same rate as his secretary. The latest is that Obama will avoid any tax changes in social security until 2019, i.e., punting the problem into President Jindal’s lap. So zero out the social security tax increases, unless Obama changes his mind for a fourth time. (People at my high school backed off of plans for trillion-dollar tax increases when faced with outrage from Above the Law commenters all the time. It was no big deal.)
Read more, after the jump.


2. Note that Obama’s latest promises are that “couples” earning less than $250,000 won’t see tax increases. So Biglaw couples who get married are screwed with a giant marriage penalty, even when they’re junior associates. If both spouses work, the cost of getting married for Biglaw associates under the Obama plan will be thousands of dollars a year more than the thousands of dollars a year it already is. The New York Sun calls it a “war on women.”
3. Obama’s latest claim is that he won’t raise taxes on people earning less than $200,000 — which is the sixth different claim about the cut-off he has made since September. And in his short Senate career, Obama has voted to raise taxes 94 times in three years, including the Democrats FY 2009 budget that will raised taxes on all people with taxable incomes greater than $32,000. (S. Con. Res. 70, CQ Vote #85: Adopted 51-44: R 2-43; D 47-1; I 2-0, 3/14/08, Obama Voted Yea; S. Con. Res. 70, CQ Vote #142: Adopted 48-45: R 2-44; D 44-1; I 2-0, 6/4/08, Obama Voted Yea.)
The question is whether President Obama will have the same tax plan as Senator Obama, Primary-Election Obama, or General-Election Obama — and whether Nancy Pelosi and Harry Reid are going to go along with General-Election Obama. A clue is the editorial’s references to Bill Clinton. Old fogies like me remember that Clinton, like Obama, promised a middle-class tax cut in 1992, and then raised taxes on the middle class in 1993.
Obama can’t even keep his promises during election season. He pledged in September 2007 to accept public financing in the general election, and then broke his pledge. He assured the MoveOn crowd in the primaries he opposed FISA reform, and then voted for it, tying supporters in pretzels. In November, he supported DC’s gun ban; today he claims to support the Heller decision (though he would almost certainly appoint justices who would eviscerate that ruling). Campaigning for the Senate in Illinois, he called for an end to the Cuba embargo; speaking to Miami residents in 2007, he supported the embargo. He told an AIPAC audience that he supported an undivided Jerusalem, a position that lasted less than 24 hours. Is it any surprise that he told the Wall Street Journal that he has a new belief against tax increases?
Even the Obama economists who wrote the Wall Street Journal piece are flip-flopping. As Greg Mankiw notes:

[Jason Furman and Austan Goolsbee] take a swipe at Senator McCain’s proposal to replace the tax exclusion for employer-provided health insurance with a more flexible health insurance credit. When President Bush suggested a similar idea last year, Furman and coauthors called it “a step in the right direction,” and many other commentators agreed. It is too bad that Team Obama is now dissing the proposal.

That Goolsbee co-wrote the piece is a delicious irony. You’ll recall that Goolsbee was the economic advisor who told the Canadians not to believe anything nasty Obama said about NAFTA in the hotly-contested Ohio primary because it was just “political positioning” and had to disappear for a few months. (Obama gave five different explanations for what happened.) It’s hard to see the Obama tax plan as anything other than “political positioning,” making Obama’s tax promises meaningless. I simply don’t know where Obama really stands, and neither do you.
4. I’m just a legal guy who was running back-of-the-napkin numbers to see how the Obama tax plan would affect me and my domestic partner and sharing the results with ATL. People who know far more about taxes than I do have taken Obama at his word and analyzed the more detailed aspects of his plans, and I recommend their work. My colleagues Alex Brill and Alan Viard have calculated the marginal tax rates under Obama’s various promises of phased-out credits, and find that he will raise effective marginal federal income tax rates to as high as 45% — which is well over 50% for people living in high-tax states like New York or California or the District of Columbia. (Even people making $45,000 will face a marginal income tax rate of 39%, which is 51.4% including social security taxes.) Douglas Holtz-Eakin also released a statement, which includes the McCain campaign’s documenting of Obama’s various shifts in position on the issue.
[Disclaimer / Disclosure: Since April, five weeks after I wrote the original ATL pieces, I have been doing unpaid volunteer work conducting research and interviews and writing memos for an adviser to the McCain campaign. I do not speak for the McCain campaign or for my day job employer.]

Sponsored