Greg Mankiw's Blog

In regard to Martin Feldstein and John B. Taylor's "John McCain Has a Tax Plan to Create Jobs" (op-ed, Sept. 2): Barack Obama is proposing large middle-class tax cuts to reward work, encourage wealth accumulation, and stimulate economic growth. John McCain is proposing little in direct tax relief for middle-income families and has proposed a health plan that would, over time, represent a significant tax increase for most American families.

You don't have to take my word for it. The National Review editorial board recently complained that Sen. McCain's plan "offers very little in the way of direct benefits to Americans in the middle of the income scale." Rea Hederman, senior policy analyst at the conservative Heritage Foundation praised Sen. Obama's tax plan as "a great step in the right direction," and explained that "the middle class would likely pay less under Mr. Obama's plan than Mr. McCain's." And even the conservative Tax Foundation confirmed as "correct" that 101 million tax filers would get nothing from Sen. McCain's middle-class tax cuts.

Faced with these facts, Martin Feldstein and John Taylor are forced to misrepresent the Obama and McCain plans. They say Sen. Obama is proposing only a one-time $1000 rebate. In fact, Mr. Obama has proposed a permanent $500 per worker/$1000 per two-earner-family tax credit to offset the payroll tax. They say that under Sen. McCain's health-insurance plan "most taxpayers will also pay less in tax." In fact, Mr. McCain's plan introduces a new tax on employer-provided health insurance benefits together with a new tax credit that does not rise with the cost of health insurance. As health-care expenditures rise faster than overall inflation, the tax increase in his plan rises much more quickly than the value of Mr. McCain's health-insurance tax credits -- resulting in a net tax increase for tens of millions of working families.

Jeffrey Liebman

Cambridge, Mass.

Mr. Liebman is an economic adviser to Sen. Obama and Professor of Public Policy at Harvard University where he co-teaches "American Economic Policy" with Martin Feldstein.

I saw this morning that you posted a letter by Dr. Liebman on your blog (to which I subscribe). The letter does not accurately reflect my comments on the Obama tax plan. Dr. Liebman has sliced my quotes well out of context. If you read the full article in the NY Sun (August 15) you will see that my quote--'great step in the right direction'--refers to reductions in the tax rates for capital gains and dividends to 20%, which is far lower than the 25% or 28% that seemed to be contained in Senator Obama's tax plan at beginning of the summer. Heritage and the Tax Policy Center both started our initial assessments of Senator Obama's tax plan with the capital gains and dividends tax rate being raised to 25%. I do think it's a step in the right direction that the Obama campaign has decided not to raise the cost of capital by as much as they planned in the beginning of the summer. But, as I noted later, it would be even better not raise taxes on capital at all.

Dr. Liebman also did not include my comments that Senator Obama is reducing middle class taxes in the wrong way. He complicates the tax code with messy tax credits that will do a host of harm to growth and fairness in the tax code.

Greg,

Three points regarding Mr. Hederman's email.

First, I note with interest that he did not disavow his statement that the middle class would likely pay less taxes under Mr. Obama's tax plan than under Mr. McCain's. The simple fact is that Heritage has now confirmed what the Tax Policy Center and others have said – Obama has larger middle class tax cuts than McCain. Of course Heritage has different ideas about how taxes should be cut, but that wasn't the Feldstein-Taylor argument. They were disputing the relative comparisons of the size of the tax cut. So I do not think I was unfair to Mr. Hederman in using him as a reference on this point.

Second, I think his beef about being misquoted belongs with the NY Sun, not with me. Look at the subheadline of the Sun piece "Heritage Hails 'Great Step in the Right Direction'" and at the second paragraph "And even some conservatives are praising him for it." It is clear that the Sun reporter concluded Mr. Hederman was enthusiastic about the overall Obama tax plan, not just a limited component of it. I obviously wasn't a party to that conversation, so I can't tell if the reporter treated Mr. Hederman fairly. But as far as I am aware, there was no letter to the Sun from Heritage objecting to this portrayal.

Third, on capital taxes Mr. Hederman wants to reframe Obama's "great step in the right direction" as a less egregious step in the wrong direction. This is simply a question of what baseline is being used. In your blog, you have often used the CBO "current law" baseline (see here). This is a baseline under which much of the tax code reverts to how it was at the end of the Clinton years. Under this standard, what Obama is proposing is a big tax cut for dividends (from 39.6 to 20 in the top bracket) and keeps capital gains the same or lower as under the baseline. So under your blog's preferred baseline, it seems like "great step in the right direction" is the correct interpretation (I personally am not a fan of the CBO baseline, but what is most important is being consistent in which baseline one uses).

And thanks for helping to build interest in Econ 1420 "American Economic Policy" for the spring. Marty and I do four joint appearances in that class and try hard to help students see why we disagree and not just that we disagree (and, perhaps more importantly, that there is much we agree on).

Jeff

Fuel prices have grounded an unexpected frequent-flyer: Sean "Diddy" Combs....

The hip-hop mogul said he is now flying on commercial airlines instead of in private jets, which Combs said had previously cost him $200,000 and up for a roundtrip between New York and Los Angeles.

"I'm actually flying commercial," Diddy said before walking onto an airplane, sitting in a first-class seat and flashing his boarding pass to the camera. "That's how high gas prices are."

the [Bush] administration is now proposing to auction off some takeoff and landing slots to the highest bidder.

The proposal has the support of New York Mayor Michael R. Bloomberg (I), but it has sparked an ideological battle over how far market controls should extend in the skies, attracting fierce opposition from figures such as Sen. Charles E. Schumer (D-N.Y.)....

"The resource is scarce and the best way to allocate it is a price mechanism," said Tyler D. Duvall, the Transportation Department's acting undersecretary for policy.

"It's part of a larger picture: We've got congestion on the roads, in our ports, in our airports," Duvall added, outlining the wider policy of the current administration. In each of these cases, he said, the market can best clear the way.

But others say auctions will do nothing to resolve the capacity problem, and could cause more confusion and incur more costs for customers than they relieve.

"This is an ideological, untested experiment from those in an ivory tower," said Schumer, who has introduced a bill to block the auctions.

The digital divide is ending not through a burst of civic responsibility, but mainly through market forces. Mobile phone technology is so powerful, and costs so little per unit of data transmission, that it has proved possible to sell mobile phone access to the poor. There are now more than 3.3 billion subscribers in the world, roughly one for every two people on the planet....

In Africa, which contains the world’s poorest countries, the market is soaring, with more than 280 million subscribers. Mobile phones are now ubiquitous in villages as well as cities. If an individual does not have a cell phone, they almost surely know someone who does. Probably a significant majority of Africans have at least emergency access to a cell phone, either their own, a neighbor’s, or one at a commercial kiosk.

Democrats in the end speak most of, and seem to hold the most sympathy for, the beset-upon single mother without medical coverage for her children, and the soldier back from the war who needs more help with post-traumatic stress disorder. They express the most sympathy for the needy, the yearning, the marginalized and unwell. For those, in short, who need more help from the government, meaning from the government's treasury, meaning the money got from taxpayers.

Who happen, also, to be a generally beset-upon group.

Democrats show little expressed sympathy for those who work to make the money the government taxes to help the beset-upon mother and the soldier and the kids. They express little sympathy for the middle-aged woman who owns a small dry cleaner and employs six people and is, actually, day to day, stressed and depressed from the burden of state, local and federal taxes, and regulations, and lawsuits, and meetings with the accountant, and complaints as to insufficient or incorrect efforts to meet guidelines regarding various employee/employer rules and regulations. At Republican conventions they express sympathy for this woman, as they do for those who are entrepreneurial, who start businesses and create jobs and build things. Republicans have, that is, sympathy for taxpayers. But they don't dwell all that much, or show much expressed sympathy for, the sick mother with the uninsured kids, and the soldier with the shot nerves.

Neither party ever gets it quite right, the balance between the taxed and the needy, the suffering of one sort and the suffering of another. You might say that in this both parties are equally cold and equally warm, only to two different classes of citizens.

New Agency Proposed to Oversee Freddie Mac and Fannie Mae

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac....

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

I have proposed a programme of “mortgage replacement loans†that I believe would stop the downward spiral of house prices. The basic idea is to provide an incentive to stop defaults among those who now have positive equity but are vulnerable to a further price decline. The federal government would offer every homeowner with a mortgage the opportunity to replace 20 per cent of that mortgage with a low interest government loan – up to a loan limit of $80,000 (€55,000, £44,000) – that reflects the government’s lower borrowing rate. Creditors would be required to accept this partial mortgage pay-down and to reduce the monthly interest and principal by the same 20 per cent. That mortgage replacement loan would not be collateralised by the house but would be a loan that the government could enforce by lodging a claim on an individual who does not pay.

With the mortgage replacement loan, people who now have a mortgage equal to 90 per cent of their house value would see that mortgage fall to just 72 per cent of the house value, implying that it would take a very unlikely price fall of more than 28 per cent to push those individuals into negative equity.

The Democrat National Convention speaker line up will feature a number of “real people†talking about the pain of living in these tough economic times, including an Indiana railroader, a Michigan truck driver, and an ordinary working mother from New York who’s saddled with $24 million in campaign debt.

The woman, who spent that money in an effort to get a better job, saw her hopes and dreams crushed because of sex discrimination in the Democrat party during the Bush administration.

Her husband has no regular paycheck and must often travel hundreds of miles to find work, so the high price of fuel has cut deeply into their monthly budget.

While she has tried to “pull herself up by her own bootstraps†by asking supporters of presidential nominee Barack Obama to pay off her debt, near-recession conditions have kept them from being able to help.

In a series of experiments, Vohs and her colleagues found ways to get people to think about money without explicitly telling them to do so. They gave some people tasks that involved unscrambling phrases about money. With others, they left piles of Monopoly money nearby. Another group saw a screensaver with various denominations of money. Other people, randomly selected, unscrambled phrases that were not about money, did not see Monopoly money, and saw different screensavers. In each case, those who had been led to think about money – let’s call them “the money group†– behaved differently from those who had not.

Trivial reminders of money made a surprisingly large difference. For example, where the control group would offer to spend an average of 42 minutes helping someone with a task, those primed to think about money offered only 25 minutes. Similarly, when someone pretending to be another participant in the experiment asked for help, the money group spent only half as much time helping her. When asked to make a donation from their earnings, the money group gave just a little over half as much as the control group.

Why does money makes us less willing to seek or give help, or even to sit close to others? Vohs and her colleagues suggest that as societies began to use money, the necessity of relying on family and friends diminished, and people were able to become more self-sufficient. “In this way,†they conclude, “money enhanced individualism but diminished communal motivations, an effect that is still apparent in people’s responses today.â€

Q: Would either candidate's energy proposals make much impact on energy costs in the short term?

A: Neither of the candidate's plans would have any impact. The one exception would be McCain's proposal to eliminate tariffs on the importation of Brazilian ethanol. It would immediately reduce the cost of ethanol.

Q: How so?

A: We have a tariff on imported ethanol from Brazil, which is made from sugar cane. Ethanol here is usually made from corn. Sugar cane ethanol is about eight times more efficient than that made from corn. By removing the tariff, Brazilian ethanol becomes cheaper and will make ethanol-gasoline blends cheaper.

Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent. "High" is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986.

Note: These calculations work as follows: (1) 37.9 percent equals the current 35 percent top income tax rate plus the current 2.9 percent Medicare tax rate; and (2) 48 to 50 percent equals Obama's 39.6 percent top income tax rate plus the 2.9 percent Medicare tax rate plus his additional 2-to-4 percent hike in the Social Security tax rate plus an additional roughly 4.5 percent for the phase-out of personal exemption and certain itemized deductions.

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."