The Obama Tax Plan

Jason Furman and Austan Goolsbee, economic policy guys for Barack Obama, have an op-ed in The Wall Street Journal defending their man against accusations of being an economy-wrecking tax-hiker. They point out that Obama’s conservative critics should have little credibility on this issue:

They said President Clinton’s 1993 deficit-reduction plan would wreck the economy. Eight years and 23 million new jobs later, the economy proved them wrong.

They also point out that the real difference between Obama and McCain is in terms of the distributional impact of their tax policies:

Sen. Obama is focused on cutting taxes for middle-class families and small businesses, and investing in key areas like health, innovation and education. He would do this while cutting unnecessary spending, paying for his proposals and bringing down the budget deficit.

In contrast, John McCain offers what would essentially be a third Bush term, with his economic speeches outlining $3.4 trillion of tax cuts over 10 years beyond what President Bush has already proposed and geared even more to high-income earners.

Last, they argue that Obama won’t even raise taxes by very much:

Overall, Sen. Obama’s middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000, making the proposal as a whole a net tax cut and reducing revenues to less than 18.2% of GDP — the level of taxes that prevailed under President Reagan.

All of this is true. Unfortunately, the third part is a little too true. As Furman and Goolsbee say in the first passage I quoted, the lesson of the 1990s is that a tax burden in the neighborhood of 20–21 percent of GDP is perfectly consistent with very robust economic growth. At the same time, we have growing public sector needs in terms of health care, education, and transportation infrastructure. Under the circumstances, it would probably be expedient for the federal spending share of the economy to go higher than the level of tax revenue that was coming in during the Clinton administration. Obama is proposing to leave tax revenues considerably lower than where they were ten years ago. The political rationale for what he’s doing is clear enough, and I think it makes sense for Democrats to avoid leading with their chins on taxes, but at the same time making the case for, at a minimum, a return to Clinton-era revenue levels shouldn’t be very difficult.