November 03, 2008
Think Like A Political Scientist, Not An Economist

Or just think like a politician, not an economist.  That's my advice to Harvard economist Greg Mankiw, who is puzzled by this:

Over at Intrade, you can bet on future tax rates.  Currently, the implied probability of a hike in the top income tax rate in 2009 is about two-thirds.

This surprises me.  Even assuming an Obama victory, I would put the probability much lower.   As an economic matter, raising anyone's taxes with the economy so weak seems ill-advised.  As a political matter, why not just let the Bush tax cuts expire at the end of 2010?  Obama could then claim in four years that he never signed a tax hike.  It seems neither economically nor politically sensible for the new President to push for an immediate tax increase, even if an eventual tax increase is his goal.

Mankiw then goes on to give three hypotheses, but misses the obvious explanation:  Many bettors think that Obama is lying.  And those bettors have history on their side; after all, Bill Clinton promised a middle-class tax cut in 1992 — and dropped that promise almost immediately after the election, instead backing tax increases that hit almost everyone, including the middle class.  (Washington state's governor, Christine Gregoire, promised no tax hikes in 2004, but switched almost immediately after taking office.)  The Clinton tax increases probably slowed the recovery, though Clinton supporters would claim that they were good for the economy in the long run.

The logic, from a politician's point of view, is simple.  If you are going to impose a tax increase, as I expect Obama to do, you should either wait until events appear to force you to impose that increase, or you should impose it immediately, to give voters time to forget before the next election.  Bill Clinton used the second tactic in 1993 (with some mix of the first) — and was re-elected in 1996.   Obama knows that.

Cross posted at Jim Miller on Politics.

(What kind of tax increase would Obama propose?  Probably a regressive energy tax, as well as increases in top rates.  He has made it clear that he favors higher energy taxes in order, as I like to say, to take power from the people.

Incidentally, I read Mankiw's site regularly, and often learn something there.  But I have no idea why he thinks that Obama's people are "savvy" about economics.  After all, to take just one example from many, Obama opposes the Colombia free trade agreement.  Some of the economists who are supporting Obama may be savvy, but there is no evidence that they have affected his thinking on issues.)

Tax series post 5

Posted by Jim Miller at November 03, 2008 07:53 AM | Email This
1. There are literally millions of inner city folks who are expecting their 'spread around' checks and if they don't get them look for riots in Downtown Seattle and other cities that will make the WTO riots look like a play ground scuffle. Dramatic tax increases will have to be passed in order to pay for them.
I have a good friend in St. Louis who says that folks in the community around East St. Louis are already going out and borrowing money counting on their expected ‘spread around’ checks from Obama to pay for their purchases. They will be lined around the block at the polling places to vote for Obama to insure that they get their ‘spread the wealth around’ US Treasury checks. People forget we had nationwide riots in 1968-69 over smaller expectations than these.

Posted by: Bob Clark on November 3, 2008 09:53 AM
2. Why be surprised? We are all going to be screwed just like with Clinton and his middle class tax cut that ended up costing this middle class guy a tax increase.

Posted by: swatter on November 3, 2008 10:53 AM
3. An Obama presidency with a democrat congress will automatically REAM the taxpayers. We've seen it before.

Posted by: Michele on November 3, 2008 11:35 AM
4. Well if Obama does make it. Remember what happened to Clinton after 2 years. The dem's lost control because they just couldn't help themself's when it came to taxing & spending.

We can be pretty sure Obama the and gang will spend like crazy and our econ will crash.
It won't be long before even the dem's well have buyers remorse and the the dem's to stop it.

I hope it doesn't happen (Obama) but just maybe our country needs a good smack in the face when it comes to electing a maxist.

Posted by: Army Medic/Vet on November 3, 2008 11:48 AM
5. "maxist?" AM/V? Freudian slip?
Either way, a propos.

Posted by: scott158 on November 3, 2008 12:01 PM
6. Only democrats equate a reduction in increase to a cut and a expired tax cut to no tax increase.

Posted by: DopioLover on November 3, 2008 12:11 PM
7. George Bush called for Social Security reform. He called for privatization to protect the surpluses from being spent, and the left vilified him. Now Obama wants to increase the payroll deduction to better fund SSI? No, he wants to raise the payroll deduction to send money to the folks who already pay no taxes and fund new programs and bigger government. Here is an inconvenient truth Barack, you can't raise nearly enough new revenue to fund all your new programs, such as subsidies to the poor to pump gas in their cars. In fact, once you raise taxes, what do you want to bet that we see a reduction, yes reduction, in revenues from the earners in America?

Biden says all the tax cuts have gone to the very, very wealthy. I'm not very, very wealthy, and in fact, I'm not wealthy. But I received a tax cut under Bush, and I still pay about a quarter of what I earn annually to one government or another. That is more than most voters who will cast a ballot for Obama. They are not entitled to what I earn simply because they can vote to take it.

I have no respect for anyone who would take what someone else earns and give it to someone else. That is robbery! Thieves deserve neither respect nor support from anyone who has integrity.

Obama and the Democrats are all about class warfare. They've sufficiently trained the poorer in this country to be selfish. Yes, the poor are greedy and they are selfish. They would destroy this nation to take from others what they can't or won't earn for themselves.

Posted by: Reality on November 3, 2008 12:54 PM
8. Anyone wanna bet how much the market will crash if Obama gets elected? All those seniors will clear out their accounts to stash the cash at home so they won't have huge capital gains!

Posted by: Melissa on November 3, 2008 01:09 PM
9. Damn.... thanks Scott.

My bad.


Last I heard the type of rich to tax was down to 120.000.
So much for 250.000.

We all know, there is NO way to give 95% of the taxpayers a lower tax.

Posted by: Army Medic/Vet on November 3, 2008 01:55 PM
10. If Obama is elected and goes ahead with his plans, the current recession will deepen substantially. He is on a path to replay the 1930's--higher taxes, protectionism (no Columbian Free Trade Agreement, unilaterally alter NAFTA, etc.), Government involvement in (Bank rescue, mortgage rescue, auto industry rescue, etc.) and bullying of (Pharmaseuticals, Oil, Coal, etc.) the economy.

Economically, one could look at the mistakes of Hoover and Roosevelt and realize that all of these things in the 1930's (Hoover and Roosevelt both raised taxes a lot, the Smoot-Hawley Trade Bill created a trade war, and the government got fully involved in agriculture, building and commodities) made the depression worse and made it last longer. However, Roosevelt blamed everything on Hoover (who did certainly deserve some of the blame, at least initially) and the Democrats today will blame everything they do to screw up the economy on "8 years of Bush". They may really hope for a repeat of the 1930's--this was after all the heyday for Democrats and the move toward socialism in this country.

"Those who do not remember history are doomed to repeat it." I'm afraid if we elect Obama tomorrow, we may, indeed, be doomed.

Posted by: Bill H on November 3, 2008 02:20 PM
11. How are you going to like it when Obama starts taxing the assets in your IRAs and 401Ks? Or starts charging imputed rent on your house even if you have no mortgage? How are you going to like it when you have to wait 3 months for an MRI or ultrasound, because health care for the underprivileged is more important? How are you going to like it when your energy taxes go sky high to pay for more "green" programs? How are you doing to like it when his Civilian National Security Force comes into your town & takes over?
And that's just for starters.

Oh, yes! Change is going to be a wonderful thing. Just be careful what you wish for as it might have unintended consequences.

Posted by: Clean House on November 3, 2008 05:35 PM
What I don't understand is that Obama has made a cornerstone of his campaign the runaway costs of government under Bush.

Well, if there's so much fat to be trimmed, why can't he simply do that and lower taxes?

I mean, if there is so much waste and so on right now, we all should be getting massive tax cuts to go along with Barack's ideas on how much government should cost....right?

Posted by: John Bailo on November 3, 2008 06:10 PM
13. It appears as if Americans have become a bit
complacent in their protection of freedom.
Wouldn't a person be embarrassed to show one
of the soldiers who died on Omaha beach what
we are about to elect into the Presidency.

Posted by: mark on November 3, 2008 07:16 PM
14. Wow. What a bunch of nervous nellies. You guys have stirred yourselves into quite a tizzy over your irrational fears of a potential Obama administration. I may not be voting for McCain, but I certainly don't expect the apocalypse if he does. And, Jim, since you turned the comments off of your McCain endorsement post, I guess I have to put in my two cents here. You describe Obama's policy positions as mistakes based on lack of understanding. Have you read or listened to his arguments? He has well-reasoned points behind the positions he holds--just as McCain does. Intelligent people can disagree on these things. But instead of making an intellectual argument about why you disagree with him, you resorted to ad hominem attacks. The most laughable is the comment about his not having books in his Senate office, to strengthen your assertion that he is not well-informed. A lot has been said about Barack Obama, but, among those who know him personally, not even his staunchest opponents have ever questioned his intellect.

Posted by: Ryan Calkins on November 4, 2008 12:36 PM
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