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February 27, 2009

Obama and Perverse Incentives

Betsy Newmark has an excellent piece up on the role of incentives in shaping decision-making:

One of the most basic lessons in economics is that people respond to incentives. They will adapt their behavior according to the incentives. But apparently, the people putting together Obama's budget writers missed that day's class in Economics 101.

In keeping with Obama's campaign promises not to tax the middle class, he's hoping to gain the money he needs for all his spending goals by increasing taxes on the wealthy. And they're looking to whatever they can increase to get more money from those higher earners. Here is one example.

About half of the money that Obama wants to raise for a healthcare overhaul would be generated through changes in the way that the wealthiest Americans itemize deductions for charitable donations, state taxes or interest payments on a home.

Under the president's proposal, joint filers making more than $250,000 a year would only recoup 28% of the value of qualified deductions, rather than higher percentages laid out under current law.

That could mean a couple in the 35% tax bracket who once could have recouped $3,500 of a $10,000 donation to a charity would now recoup only $2,800.

The White House estimates the change would generate about $318 billion over 10 years.

She points out that a 1990 tax on luxury items, lauded by its Democrat sponsors as a nifty way to increase tax revenues and force the Chinese-toy-loving-minions-of-the-richest-2% to pay their "fair share", didn't just fail to increase revenue.

It put lower-income taxpayers out of work:

... it wasn't long before even those die-hard class warriors noticed they'd badly missed their mark. The taxes took in $97 million less in their first year than had been projected — for the simple reason that people were buying a lot fewer of these goods. Boat building, a key industry in Messrs. Mitchell and Kennedy's home states of Maine and Massachusetts, was particularly hard hit. Yacht retailers reported a 77 percent drop in sales that year, while boat builders estimated layoffs at 25,000. With bipartisan support, all but the car tax was repealed in 1993, and in 1996 Congress voted to phase that out too.

As I pointed out several months ago, only two days after the election the mere prospect of a hike in marginal tax rates had baseball agents pondering ways to shelter their clients' income from an Obama tax increase:

Looking ahead to the possibility of an Obama administration, some baseball agents already are thinking about trying to beat a possible tax increase for their well-paid clients.

Democratic presidential candidate Barack Obama has proposed increasing the top federal income tax rate from 35 percent to 39.6 percent, where it was under the Clinton administration. If signing bonuses are paid before Jan. 1, they likely would be taxed at the current rate and would not be subject to any tax increase.

As we noted before the election, rational actors (that's people to the folks at home) adjust their decisions in response to incentives.

With entirely foreseeable consequences.

These days we are hearing an awful lot about fairness, which seems to be a progressive code word for a rather startling assertion on the part of the Obama administration: namely, that government has the right to seize the private property of those judged to be "too wealthy" and hand it over to those judged to be "economically disadvantaged". But as I observed yesterday, simply looking at one side of the tax picture - marginal tax rates - doesn't give an accurate picture of the redistributive effects of tax policy because it looks at just one side of the equation: how much is paid into the tax "pot" by taxpayers in various income brackets.

What is conveniently ignored is the other side of the equation: what does government do with this money? How are tax proceeds disbursed to taxpayers in different tax brackets?

This chart, created with the help of the Tax Foundation, shows the dollar for dollar "return on investment" received by households in each income bracket.

Tax ROI.jpg

As you can see, when you look at the net effects of government spending (leaving out public goods** which are enjoyed by all households), our current tax code accomplishes much more in the way of redistributing income than mere examination of what is paid into the system can possibly reveal:


Figure 9 compares household tax burdens to the amount of government spending received by Americans. It answers the following question: “For every dollar of taxes paid, how much government spending is targeted at households in return?” As is clear from the figure, when government spending is considered along with tax burdens, the overall picture of the fairness of government policy is dramatically different from the usual picture of tax burdens alone. Some households clearly benefit much more from current tax and spending policy on a dollar-for-dollar basis than others. Overall, households in the bottom three quintiles are net beneficiaries from tax and spending policies.

They received more than one dollar of government spending for every dollar of taxes they paid in 2004. In contrast, households in the top two quintiles are net fiscal payers, receiving less than one dollar of government spending for every tax dollar paid to governments.

When all government spending is included, households in the lowest quintile received about $8.21 in spending for every dollar of taxes paid. Households in the middle quintile received $1.30, and households in the top quintile received $0.41.

Question for the ages: is this "fair"?

Posted by Cassandra at February 27, 2009 07:23 AM

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I'm not sure why I even bothered to get up this morning...

Posted by: Carrie at February 27, 2009 08:21 AM

Now, lessee, here.

According to Dem logic, I will want to work harder in order to earn more money so that I will get to keep even *less* money?

Not to belabor the obvious, but what's my -- heh -- incentive for doing that?

Posted by: BillT at February 27, 2009 08:39 AM

I'm not sure why I even bothered to get up this morning...

You got up this morning in order to hand your fellow Americans a heaping helping of "social justice"!


Posted by: Cass at February 27, 2009 08:48 AM

Best and Brightest redux...

Social justice? Ha!
*sitting quietly in the corner with Samuel hoping my deerskins will fit over the exoskeleton, should the need arise*

Posted by: bt_hang-em-high_hun at February 27, 2009 08:58 AM

If it's any consolation, Obama's carbon tax program, oops! I mean his "carbon cap & trade" boondoggle, is going to screw us all equally, particularly those of you who drive cars, use electricity, or have a job.

Posted by: spd rdr at February 27, 2009 10:27 AM

Of course it's not fair. If you are spending any money on the rich at all, all you are doing is transfering wealth to the already wealthy!

Posted by: Screwed, the (Gold Farting) Pooch at February 27, 2009 10:45 AM

If it's any consolation, Obama's carbon tax program, oops! I mean his "carbon cap & trade" boondoggle, is going to screw us all equally, particularly those of you who drive cars, use electricity, or have a job.

Look buster: when the Oceans begin to heal you'll be singing a different tune.

Posted by: I am the Change I've been waiting for... at February 27, 2009 10:58 AM

...his "carbon cap & trade" boondoggle, is going to screw us all equally...

I wanna know how he plans to apply "cap & trade" to the kazillions of trees growing nationwide.

Plants *emit* carbon dioxide at night.

Posted by: BillT at February 27, 2009 11:05 AM

All Gaia's creatures are created equal.

It's just that some of us are more *equal* than others :p

Posted by: The Trees at February 27, 2009 11:10 AM

"Plants *emit* carbon dioxide at night."
Indeed... And as spokesplankton for my gazillion buds in Gaea's seas from coast to coast, I would like to issue a Cease and Desist order to the current POTUS and Congress.

Stop messing with our food source!

Just vote Present.

Posted by: Phyto Plankton the IIIx10^1024x10^1024-ad_infinitum at February 27, 2009 11:36 AM


We must take urgent action. The Earth has a temperature!

Posted by: Big Al "It Snows Wherever He Goes" Gore at February 27, 2009 12:20 PM

"The Earth has a temperature!

Did you use a thermometer? Was it oral or rectal? No..... that's a cigar, Al.

Posted by: M.Lou Winsky at February 27, 2009 12:45 PM

Did you use a thermometer?

Nope. His bathroom scale.

Posted by: BillT at February 27, 2009 01:06 PM

"Did you use a thermometer? Was it oral or rectal? No..... that's a cigar, Al."
Are you talking about Al or that strange fellow in charge of the PowerPoint® Budget roadmap slides?

If it's Al and he can hang on for a couple of million years, me and the buds'll settle down to business and squeeze out some more petroleum jelly for his, ah... thermometer. Off-shore drilling and product refining required, of course.

But that's contingent upon the Best and Brightest not appointing some hack climate czar to unchain the food source at the first link.

If they do, they can all pound sand.

Posted by: Phyto Plankton the IIIx10^1024x10^1024-ad_infinitum at February 27, 2009 01:07 PM

Give the world some Motrin and Tylenol and let's be on our way.

WRT to the topic of this post, THAT is why I am scaling back, if not ceasing completely, my work outside the home. Depending on how much I work (need to re-run the numbers) it could put us up in to the next tax bracket. Which means that I would be working ONLY to pay taxes and afterschool care for my kids.

No thanks. I'd rather stay home and read - for FREE - all day long. The house would probably be cleaner too. Woohoo - double bonus. Not having to give some of my hard-earned money to those without jobs is just icing on the cake.

Posted by: Sly's Wardrobe Mistress at February 27, 2009 02:11 PM

I see a bright future for barter amongst the tribes...

*Not gonna look at the ROI charts again today for the sake of anger management*

Posted by: bt_Have-Barter-Will-Travel_hun at February 27, 2009 02:19 PM

Now our beloved sheep are poisoning the atmosphere with their incessant belching as they survey the landscape from their perch on the cliff. What with the flatulating bovines and gaseous sheep I am afraid to walk in the barnyard.

Reminds me of that short-lived Budweiser commercial at a super bowl years ago. Remember the guy lighting the candle in the horse-drawn sleigh? His honey was dressed in her finest, hair done perfect, make-up luminescent, nails shiny with "Dusk Over Detroit." The horse, obviously of the "B" team of Clydesdales, looks around and whinny's "Yeah, this is gonna happen" as the erstwhile suitor bends over to remove the champagne. The horse, proving that a high-fibre diet plus lots of cantor will equal one giant flatulation for mankind's carbon footprint, lets go with enough methane to turn the candle into a blowtorch.

When our hero sits up and turns to his beloved he is confonted by the very real and practical negatives of global warming. Immediately realizing he is not going to get to any "base" that evening he devises a way to harness the energy from sheep gas, equine flatulence, and bovine imprudence for his hybrid, metro-sexual Cushman.

He still had a chance to score a home-run but failed to have his chapstick handy! The horse was never heard from again.

Posted by: vet66 at February 27, 2009 02:25 PM

Of course it's fair. The people in the top quintile got that money by exploiting and abusing the people in the lower two quintiles, so it's not only fair but justice that the government determine what the results of that exploitation is and take the money and give it back to the people at the bottom.

Think I'm exaggerating? Listen to this video of then-State Senator Obama speaking in 2001. Here's a partial transcript of his remarks:

If you look at the victories and failures of the civil rights movement and its litigation strategy in the court, I think where it succeeded was to invest formal rights in previously dispossessed people, so that now I would have the right to vote. I would now be able to sit at the lunch counter and order and as long as I could pay for it I’d be OK.

But, the Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society. To that extent, as radical as I think people try to characterize the Warren Court, it wasn't that radical. It didn't break free from the essential constraints that were placed by the Founding Fathers in the Constitution, at least as it's been interpreted, and the Warren Court interpreted in the same way, that generally the Constitution is a charter of negative liberties. Says what the states can't do to you. Says what the federal government can't do to you, but doesn't say what the federal government or state government must do on your behalf.

And that hasn't shifted and one of the, I think, tragedies of the civil rights movement was because the civil rights movement became so court-focused I think there was a tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalition of powers through which you bring about redistributive change. In some ways we still suffer from that.

Posted by: RonF at February 27, 2009 03:37 PM

What with the flatulating bovines and gaseous sheep I am afraid to watch Congress on CNN

There. Fixed it.

Posted by: RonF at February 27, 2009 03:39 PM

News report this morning:

Obama's Budget: Almost $1 trillion [that's $10^12] in new taxes over the ten years starting 2011

1) on people making more than $250k:

  a) $338 billion - Bush tax cuts expire

  b) $179 billion - itemized deductions eliminated

  c) $118 billion - capital gains tax hike

Total: $636 billion over 10 years

The other $300 billion or so is in corporate tax increases.

Still, it's spread over 10 years, so it won't be all that bad:

$63.6 billion/year, / US population of 300 million, is a paltry $212/person extra a year.

A small price to bring about sweetness and light over the whole earth, to bring about a New Era of Peace and Tranquillity, where not only will the lamb lay down with the lion, but the Hamasite will lay down with the Israelite and not explode in an outburst of religious ectasy.

Losing itemized deductions may make our wealthy benefactors less likely to donate to charities, but heck, who needs charities anyway when a munificent Government is ready and willing to step in and heal the wounds of the afflicted.

By giving them our money.

Posted by: ZZMike at February 27, 2009 07:51 PM

But just remember, ZZMike, it won't be enough.

This is just the first "downpayment" on "hope and change".

It won't be enough, so expect taxes to go up in 2011. And the next time, they'll be coming after any and all those "rich people" that make more than the median national income. Sometimes known as the "middle class".

Posted by: Don Brouhaha at February 27, 2009 08:18 PM