Saturday, March 29, 2008

Kuttner and Krugman on Obama

Paul Krugman had two problems with Barack Obama's speech on the economy

his proposals for aid to the victims of the current crisis, though significant, are less sweeping than Mrs. Clinton’s


Mr. Obama also continues to make permanent tax cuts — middle-class tax cuts, to be sure — a centerpiece of his economic plan. It’s not clear how he would pay both for these tax cuts and for initiatives like health care reform, so his tax-cut promises raise questions about how determined he really is to pursue a strongly progressive agenda.

Also he

Robert Kuttner was very favorably impressed

Barack Obama's speech on the financial crisis was a remarkable breakthrough.

Kuttner stresses that he has agreed with Krugman's criticisms of Obama in the past.

I actually shared Krugman's critique of Obama's health insurance individual mandate and his proposal to tax the upper middle class to pay for a much exaggerated Social Security shortfall that is more like a rounding error.

I agree with both of them on mandates and strongly disagree on Social Security. Obama's social security proposal was to raise the payroll tax ceiling and thus to increase taxes paid by individuals with labor income over $102,000. These are not poor people. A fellow populist claims that they are about the top 6% of earners. Why is Kuttner opposed to raising their taxes ?

In his column Krugman makes an excellent point "The moral is that it’s important to take a hard look at what candidates say about policy." Krugman means listen what they propose to do, not their tone, their rhetoric or their manner. In the case of the proposal to raise the FICA ceiling, he, like Kuttner absolutely refuses to follow this advice. Neither discusses whether the proposed reform would make America better or worse. Both stop when Obama says that there is a problem which should be addressed -- the actuarial balance of the Social Security Administration. They argue, convincingly, that this is a small problem compared to all other sectors of the US federal budget. So ? If they have no problem with the policy proposal, why do they object to the way it is presented. Note Krugman's excellent point.

Now how about the middle class tax cuts which Krugman doesn't like.

Provide Middle Class Americans Tax Relief

Obama will cut income taxes by $1,000 for working families to offset the payroll tax they pay.

* Provide a Tax Cut for Working Families: Obama will restore fairness to the tax code and provide 150 million workers the tax relief they need. Obama will create a new "Making Work Pay" tax credit of up to $500 per person, or $1,000 per working family. The "Making Work Pay" tax credit will completely eliminate income taxes for 10 million Americans.

Now it's pretty clear how Obama plans to pay for this. He plans to raise the FICA ceiling. His plan clearly is to make FICA less regressive by cutting it by a fixed dollar amount and raising the ceiling. He doesn't want to be accused of being a class warrior (which he clearly is) so he presents the increase as shoring up social security and the cut as a cut from the general budget. The shift from the general fund to the SSA trust fund is only as good as the lock on the lockbox, which can be picked by any idiot, even a Republican. However, it does no harm.

Krugman is convinced that Obama is not solidly progressive because Obama wants to finance a (roughly) lump sum transfer to workers by raising payroll taxes on the richest 6% of wage earners.

1 comment:

marcel said...

The one arguably good reason I've heard for not raising the cap, or getting rid of it altogether, is the following. At the moment, the SS tax is neglible for the rich. They may object to SS on principle, but it doesn't really cost them anything, so most aren't willing to spend to much energy opposing SS. The payroll tax operates like (I've heard that) taxes in Sweden or perhaps, more generally, Scandinavia: capital is lightly taxed, labor heavily, and there is a lot of redistribution of labor income from the more affluent to the less, as well as a solid floor maintained. This is part of the reason that the failry heavy tax burden has not generated a lot of opposition from the rich.

So, the argument is that it is better politics, if not policy, to have a cap on the payroll tax. Obviously one can make a similar argument for almost any redistributive proposal, and one has to judge each separately.

I don't know enough to judge whether this argument is sound. My heart and values say, "Get rid of the tax." But perhaps it is better in the LR this way.