By David Henderson
In today’s Wall Street Journal, Laura D’Andrea Tyson has a defense of “Obamanomics.” At least that’s the title the Journal gave it. The article is worth looking at for a number of reasons:
1. In discussing President Obama’s spending plans, Professor Tyson uses the term “investments” instead of the more-accurate term “spending” 7 times. This is reminiscent of how the Clinton administration categorized new spending when she was in that administration.
2. She starts out by saying that Obama “inherited an economic crisis worse than any the nation has experienced since the Great Depression.” It’s legitimate for an author to start that way if she tells us, somewhere in the article, her basis for that claim. She doesn’t.
3. She states: “These changes [Obama’s proposed tax increases on high-income people] will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade.” This is probably false. A substantial percentage of people making over $200,000 in future years will be people who were not making that much in past years. She completely leaves out the fact of income mobility.
4. In justifying Obama’s plan to limit deductions, she asks as a rhetorical question: “But why should a family in a higher tax bracket get a bigger break on expenses than a middle-class family?” Um, because they pay a higher percent of their income in taxes, both on average and on the margin.
5. Tyson states, “Those who stand to lose from these changes [the tax increases] are already protesting.” Not quite true. Some of those who stand to lose are protesting. More important, many of us who think we will never make $250,000 a year are protesting. Notice the insidious way she has undermined the opposition. The subtext is that they’re just out to defend their own self-interest. She leaves out two motives, both of which are behind my protests and, I would bet, those of many others: (1) we think it’s unjust to make high-income people, who already pay a disproportionately high share of their income in income taxes, pay even more, and (2) we think it will have harmful consequences for the economy.
6. She states:
Critics of a cap-and-trade system are correct when they claim it will raise the prices of goods and services whose production and use emit carbon. That’s exactly the point: Higher prices are necessary to encourage energy efficiency and the development of renewable energy, to discourage carbon emissions, and to reduce the societal costs of global warming.
This is one of the few good pieces of reasoning in her article. Notice, though, that the only way this increases “energy efficiency” in the economic sense is if energy is underpriced and the only way she can establish that it’s underpriced is to establish that the externality from carbon emissions’ addition to global warming is substantial. This she does not do.
Notice also that she admits that the price will be higher. That will be important when the issue is debated and various people advocating carbon permits claim that it won’t raise prices of goods and services.
7. She argues for “reducing the nation’s dependence on foreign oil,” but fails to say why that is important. That’s not surprising, because it’s hard to make a case that reducing “dependence” (a misleading term) on foreign oil is a good idea.
8. One of the few saving graces (though, in my view, not saving enough) of an auction plan for carbon permits is that the revenues it generates can be used to reduce marginal tax rates, whether on individual income, corporate income, or taxed commodities like cigarettes, alcohol, imported shoes, imported trucks, or imported textiles. (All 5 of these commodities are subject to federal taxes.) The deadweight loss from a tax is proportional to the square of the tax rate and so reducing marginal tax rates reduces deadweight loss substantially. A 10-percent cut in a marginal tax rate would reduce the deadweight loss from the tax by 19 percent. But Tyson admits that 80% of the revenues would be used to a finance a tax credit for all but the highest-income people. The tax credit would be “refundable,” a euphemism meaning that people who don’t pay any income taxes would receive it. And, of course, over the phaseout range of the tax credit, so that we can make sure those high-income people get none of it, marginal tax rates would rise. Net effect: not less deadweight loss, but more. And the remaining 20% of the revenues? It “will be used to “finance investments in energy efficiency, clean energy and smart-grid technologies.” In other words, the money would go to “winners” that the federal government picks. Do you feel reassured?