Some anti-tax commentators and right-wing blogs have apparently given up trying to paint Barack Obama's tax plan as a tax increase on the middle-class (since that would be untrue in any interpretation humanly possible). Instead, they have settled on a novel argument: The Obama tax plan would unacceptably raise marginal tax rates on low- and middle-income people, as argued by Alex Brill and Allen Viard of the American Enterprise Institute.
People who don't live and breathe tax policy might scratch their heads and say, "Wait, I thought I heard that Obama wants to cut taxes for everyone except the rich."
He does. The critics' new argument is not that he would raise taxes but that he would raise the marginal rates, meaning the tax rate applicable to an additional dollar of income, for people in specific income ranges. This would occur, they complain, because the various new or improved tax credits that Obama proposes would be phased out for people above certain income levels.
Imagine a working person paying income taxes at the 25 percent rate. Imagine also that in 2009 this person benefits from a newly enacted tax credit that is phased out for people with higher income, at a rate of $100 for each $1,000 of income over some threshold, and that this taxpayer's earnings are just one dollar above that threshold. The critics reason that this would translate into a tax rate of 10 percent for each additional dollar earned, on top of the ordinary income tax rate of 25 percent, resulting in a marginal rate of 35 percent. This would be true even though the taxpayer has lower taxes as a result of the new credit. Surely, the critics argue, this person would be better off if she never received the tax credit, because then her marginal rate would be just 25 percent, and she would have greater incentive to work and save.
The right-wing critics want this working person to pay higher taxes? Are they against tax cuts? Yes, actually, if they're targeted towards poor or middle-class people. These critics are essentially against any tax benefit (or any public benefit, for that matter) that is made available only to people with incomes below a certain level because such income-targeting, in their view, discourages people from working harder to increase their income.
So would low-income people or middle-income people see a new credit on their federal tax form and decide that they should work fewer hours? No. Common sense, and the academic literature on this topic, tell us that people do not respond this way to tax policy.
The evidence that marginal tax rates really impact decisions about work is weak or nonexistent. The last time the right trotted this line out, it was to support the Bush income tax cuts, which reduced marginal rates, with most of the benefits going towards the well-off. (Put aside for a moment the tax cuts Bush has showered on people who live off their investments.) As the Center on Budget and Policy Priorities pointed out back when the 2001 Bush tax cut was being debated, it's not clear that higher marginal rates discourage work or savings, and they may even encourage it. Logically, if someone has a particular earnings goal or savings goal, the result of a higher marginal tax rate could be that they work more in order to meet that goal. The Center on Budget cited several economists who found that the evidence pointing towards reduced work was very weak.
It is extremely doubtful to us that cutting taxes for any income group is a wise policy right now given the budget deficit and the fact that people are paying relatively low taxes already. But Senator Obama has proposed tax cuts nonetheless, and he at least has ensured that the bulk of them would go to people who are not super-rich. Some right-wing activists feel like they've won the argument about whether tax cuts are good -- both candidates seem to think they are -- so now they want to argue with Obama because he refuses to target most of his tax cuts towards the wealthy instead of the poor and middle-class. It's a telling moment for the right. And it shows us what happens when you start to give in to anti-tax rhetoric.