A heated discussion is taking place in the economic blogsphere over the rival tax plans of Presidential candidates Barack Obama and John McCain. Of course, the battle of rival tax blueprints has been in force ever since the two hopefuls sewed up their respective nominations, but a new round of fighting recently erupted. A number of important points have been made. But the fiscal policy dispute, while informative and fascinating, has focused too much on tax regimes and not enough on the real challenge: health care. When it comes to domestic, nonmilitary fiscal policy in the new millennium, everything is dwarfed by health care.
The initial salvo seems to have come from an article critical of Obama's tax proposals in The American, a publication of the American Enterprise Institute (AEI). The article's title: "The Folly of Obama's Tax Plan."
"Unfortunately, a close inspection of Obama's proposals reveals something disquieting: He would raise marginal tax rates for many middle-income taxpayers, a bad move for anyone seeking to promote economic growth," charge AEI scholars Alex Brill and Alan Viard.
Cherry-Picked Example
Greg Mankiw, a Harvard University economist and 2003-05 head of the Council of Economic Advisers under President Bush, posted a favorable link to the article on his blog. That prompted a swift response from a group of economists aligned with Obama. "The key point that Brill and Viard neglect to note or discuss is that even in their cherry-picked example, higher marginal tax rates bring along offsetting benefits to families with lower and middle incomes," posted econ4Obama.
Tyler Cowen, an economist at George Mason University and the best-known blogger of the dismal science, weighed in on his blog. So did blogger Brad DeLong, an economist at the University of California at Berkeley. Obama economic advisers Jason Furman and Austin Goolsbee stepped up with a long op-ed piece in The Wall Street Journal. Mankiw reacted to their arguments on his blog. And so on.
Nevertheless, despite considerable illumination, the blogsphere tax dispute doesn't seem very important. What does matter is health-care reform, and from that base, tax and budget policy flows. As Dean Baker, an economist and co-director of the Center for Economic & Policy Research in Washington, has repeatedly emphasized on his blog, "virtually the whole [government] debt story is due to projections of exploding health-care costs."
To be sure, the claim that Obama will substantially hike taxes on ordinary Americans, dampening incentives to work and invest, is nonsense. To a large extent, much of the debate revolves around semantics. Letting the Bush tax cuts expire for some high-income folks could be called a tax increase. But since the Bush-inspired tax cuts automatically expire at the end of 2010, it's hardly a question of "enacting" a new tax hike. It could just as easily be called a return to the tax regime of the 1990s, hardly a lost decade in economic terms.
The Richest Pay a Lower Rate
What about marginal tax rates? Bill Gross, the legendary bond trader and chief investment officer of mutual fund giant Pimco, got it right in his monthly newsletter penned a year ago.