Impressed with Obama’s Adjustment

I am impressed with Barack Obama’s recent adjustment. After being criticized by John McCain for expanding welfare (increasing payments to those who do not work)… Obama improved his position, dropped those payments, and focused on a class which we used to call the deserving poor:

Political Radar: Obama Tweaks Tax Plan to Rebut McCain
Facing criticism from John McCain that his tax plan constitutes “welfare,” Barack Obama recently added a work requirement to one of his proposals.

“They started saying this was welfare,” said Obama adviser Austan Goolsbee. “So, just so they would absolutely not be able to say that, we decided that for the last two percent we’ll simply add a work requirement.”

Goolsbee referred to the number of non-working Americans who would benefit from the original understanding of Obama’s plan as an insignificant “sliver” when compared to the much larger number of working Americans who would benefit from Obama’s plan.

Our brains are wired to detect cheaters. Cheater detection is the part of human nature that revolts at providing subsidies to those who do not contribute fairly. One big problem that old-style tax-and-spend liberals had is that they wanted subsidizes for all those who were poor, whether they were deserving or not.

People naturally are repelled at providing to charities to encouraging social cheating, such as shirking responsibility, and it is virtuous for people to refuse to support such institutions. Too many old-fashioned Democrats were never able to see that, so potentially good social programs were either trashed out of concern the Democrats would let the cheaters in, or become magnates for cheaters themselves.

Obama, by shifting his position to try to freeze out the ‘undeserving poor,’ seems to understand that. And that’s a good thing.

20 thoughts on “Impressed with Obama’s Adjustment”

  1. It appears Obama can learn. It’s something we haven’t seen a lot of over the past few years.

    I still wish the McCain who is running now was the McCain who ran in 2000. It would have been a much more interesting argument with Obama. We all might have learned something.

  2. Obama’s flip-flops have generally been in the right direction [1].

    What surprises me about his move here is that it doesn’t seem to be one governed by defaulting to whatever the Democratic establishment would want. It may be very Clintonlike, but from Obama it’s odd… [2]

    [1] http://www.tdaxp.com/archive/2008/06/15/obama-flip-flops-toward-truth.html
    [2] http://www.tdaxp.com/archive/2008/06/19/the-foreign-policy-advantages-of-obama-as-bush-iii.html

  3. From what I’ve heard, Obama is a lot less dependent on the DNC’s money than McCain is on the RNC’s. He can afford to tack in any direction he chooses.

  4. Looking at Obama’s tax policies I have two thoughts:

    1. It appears that he wants to increase the mortgage tax credit. As the latest financial crisis has unfolded I’ve begun to wonder whether or not making homeownership a public policy goal is a good thing. Putting aside the recent crash in the real estate prices, I wonder if the encouragement of homeownership places constraints on labor mobility that harms overall GDP growth. Would we be better off as a society of nomadic renters whose primary wealth was largely in IRAs or 401ks? I don’t know, but I’m not longer quite so sure that widespread homeownership is a net positive.

    2. The $4,000 refundable tuition tax credit looks promising. As advertised, it appears to be aimed at traditional 18-22 year old college students, but if in practice it works for part-time as well as full time students, and for graduate and professional and technical schools as well as undergraduate institutions it would go a long way towards building a resilient 21st century work force and therefore weaken the arguments of the Smoot-Hawleyites, and therefore strengthen globalization. Perhaps Obama could become the “re-education” President or the “Continuing Education” President.

    Broadly, Obama seems to favor refundable tax credits to boost the earnings on working and middle class Americans. In The Myth of the Rational Voter, Bryan Caplan points out that 1 of the 4 biggest factors in predicting whether or not a given voter will be opposed to free trade is that they have seen their income drop recently; so policies that work to boost the income of the working class can weaken the appeal of protectionism.

    All of this assumes, of course, that Obama doesn’t attempt to pay for all his proposals by levying a massive tariff of some kind and that he was just joking when he said he would renegotiate NAFTA.

  5. Umm….

    The purpose of Obama’s 10 percent universal mortgage credit is to aid taxpayers who do not itemize when filing taxes. The Obama campaign estimates that it would provide an average of $500 to 10 million homeowners, the majority of whom earn less than $50,000 per year.

    Why subsidize homeowners at all over renters? Why subsidize them even more? There is no reason to have any federal mortgage credit. Once again, this is the government distorting economic decisions made by regular people.

    Shouted Political Message from Obama: “Vote for me and I will give you money!”

    Whispered Political Message from Obama: “…by taxing those other folks”

    Related: Many of the forms I have seen over the years invoke “tax deductability” as a reason to but over renting (or to buy even bigger). Most of those worksheets had the math/tax ramification wrong and therefore nudged people to owning who should not have, or nudged people to buy a bigger house (take a bigger mortgage) then they should have bought.

    I think “real change” would be a simple flat tax or perhaps a 2 rate tax on all income. One rate for income up to the Poverty line (or 1.5X Poverty Line), and a second rate for all income above that. No deductions.

    I am okay with a Consumption Tax version of the above.

    I used to think that such a plan shouldn’t tax income until the poverty level (or something close to it) was reached. I have read info recently showing how people below the poverty line hold/vote overwhelming socialist views/candidates. SO, I thin having them pay taxes would be a good education.

  6. Brent:

    Putting aside the recent crash in the real estate prices, I wonder if the encouragement of homeownership places constraints on labor mobility that harms overall GDP growth. Would we be better off as a society of nomadic renters whose primary wealth was largely in IRAs or 401ks? I don’t know, but I’m not longer quite so sure that widespread homeownership is a net positive.

    Interesting thought (this is why I read blogs).

    There are lots of positive reasons to own a house. There are negatives too. The positives and negatives may wash out.

    My view is that USGOV should not be distorting individual economic choices with regard to renting vs buying (and vs buying how much).

    The Caplan book remains on my anti-library.

  7. Purple
    A potential positive about Obama’s tax plan is that it may start to subsidise several potential avenues for wealth building. For example, it suggests a refundable savings tax credit, and refundable education tax credit. Both adding to your personal savings (even if simply putting money in a bank account) and increasing your marketable job skills are potential wealth creating activities and ought to be subsidised at least as much as homeownership.

    In a perfect world I’ve always liked Steve Forbes’ flat tax. No taxes until the median income (~42k) and 17% on every dollar above that ammount. No deductions.

    The problem is that anybody who advocated positions such as the elimination of the child or mortgage tax credit would almost certainly be branded as “anti-family”.

  8. Michael,

    The McCain campaign is increasingly hard to read. [1] Definitely dispiriting.

    Brent,

    The $4,000 refundable tuition tax credit looks promising. As advertised, it appears to be aimed at traditional 18-22 year old college students, but if in practice it works for part-time as well as full time students, and for graduate and professional and technical schools as well as undergraduate institutions it would go a long way towards building a resilient 21st century work force and therefore weaken the arguments of the Smoot-Hawleyites, and therefore strengthen globalization. Perhaps Obama could become the “re-education” President or the “Continuing Education” President.

    Interesting. Education spending is currently accounted for as consumption, even though it is truly investment spending. This is promising.

    We have the best tertiary education system in the world. Building it up should give us a better educated work force, and attract more from oversees to study (and hopefully, work) here.

    Broadly, Obama seems to favor refundable tax credits to boost the earnings on working and middle class Americans. In The Myth of the Rational Voter, Bryan Caplan points out that 1 of the 4 biggest factors in predicting whether or not a given voter will be opposed to free trade is that they have seen their income drop recently; so policies that work to boost the income of the working class can weaken the appeal of protectionism.

    This is a good point, but in general low-income correlates with short-time-horizon, so merely giving people only marginally able to care for themselves money may not do much to help them. Better to spend it on universal health care, [2] I would think, which can help throughout life and can’t be wasted.

    Excellent points. Reminds me of things Fareed said. [3]

    PS,

    Why subsidize homeowners at all over renters? Why subsidize them even more? There is no reason to have any federal mortgage credit. Once again, this is the government distorting economic decisions made by regular people.

    I was long surprised that liberals would be so quiet in the face of massive social engineering (home-ownership seems to make one more fiscally conservative, hence the mortgage interest deduction was essentially paying people to be conservative).

    Obviously, the flip-side I ignored was that it acted as a subsidy to groups that vote Democrat.

    It’s hard to see why it is worth the cost, anymore.

    [1] http://ap.google.com/article/ALeqM5gN2UuEbyF64GtuHQfJzWDqDg7PqgD9409HJ00
    [2] http://www.tdaxp.com/archive/2008/07/02/republicans-for-national-health-care.html
    [3] http://www.tdaxp.com/archive/2008/07/09/review-of-the-post-american-world-by-fareed-zakaria.html

  9. Obama’s jumped back into the stupid, criticizing McCain for saying it’s fundamental economics that companies go where taxes (that is, cost of doing business) are lower. Obama called that wall street economics, or something equally moronic.

  10. How would a flat tax work if applied to businesses?

    If there is going to be a tax on C Corporation type businesses, I would do it as a flat rate against cash flow, not based off earnings.

    Earnings can be manipulated all sorts of ways…cash flow reporting not so much. Investors know that cash flow is a better signal then earnings anyway.

    The cost of tax compliance would go way down because businesses would not need to keep separate books for different types of earnings reporting (Sec, IRS, States, Investors). Businesses already keep track of cash flow.

    A positive side effect of taxing the cash flow is that businesses can get immediate tax benefits from capital spending (capital spending reduces earnings over time – as depreciation – but hits cash flow right away).

    A Single Rate Cash Flow tax on businesses could be revenue neutral to USGOV and still be a positive in reduced expenses for businesses and for USGOV.

    Of course, most US Businesses pay no income taxes so they would pay no cash flow tax. This harping point by anti-capitalism politicians depends upon most people not noting that most businesses are not C-type corporations – which are the only ones that pay a corporate tax.

    Most businesses are S-type corps, LLCs, LLPs, partnerships, or sole proprietorship. For those, earnings flow to the owners where it is then taxed as personal income. So for these, as cash is passed thru to the owners, it could be taxed as income.

    As far as personal income taxes, I would also be okay if the income tax was replaced completely with a partial flat tax and partial national sales tax.

    Almost any of the reforms you here bandied about are better then the current system.

  11. Purpleslog wrote:

    “Why subsidize homeowners at all over renters? Why subsidize them even more? There is no reason to have any federal mortgage credit”

    Would you rather live in a community of 100 % homeowners or one composed of 100% renters?

    If you have a fondness for crack whores and rootless drunkards, choose the latter.

    I’m exaggerating, but not by much. Everyone rents at some point in their life, usually when they are young and at the start of their careers or temporarily, at some transition point. That’s fine. however, I’ve sat on a planning commission and the aggregate mean differences in social behaviors between large aparttment complexes and adjacent subdivisions is staggering. Crime stats for apartment communities are astronomical in comparison. Ask any cop in a medium sized or larger town where all their two a.m. response calls emanate from or where they pick up people on warrants from and they will point you to the most run-down rental units in 10 minutes driving distance.

  12. “Obama’s jumped back into the stupid, criticizing McCain for saying it’s fundamental economics that companies go where taxes (that is, cost of doing business) are lower. Obama called that wall street economics, or something equally moronic.”

    Agreed, you can see it in Ohio and NC, two states rapidly losing jobs because of extraordinarily high tax rates. That’s why Pat McCrory must win in NC if this state is to recover.

  13. Compromise, Zen? There’s good reasons and bad reasons for both renting and home ownership. Maybe a better approach would be to replace policies favoring one or the other as a societal good with policies that encourage both activities when they’re done for the right reasons?

  14. zen brings up the right-wing social engineering behind the mortage subsidies: the idea we could instill middle-class values into the working-class through helping then acquire real property.

    Half Sigma has discussed some other ways to instill middle class values [1,2]. At least among the very low class, changing neighborhood environments seems not to help [3].

    Eddie,

    There’s a lot of upsides for the Democrats on economic issues, as long as they avoid the corrupt and the knee-jerk. [4]

    [1] http://www.halfsigma.com/2008/06/middle-class-values-a-response-to-aph.html
    [2] http://www.halfsigma.com/2007/06/can_we_teach_th.html
    [3] http://www.tdaxp.com/archive/2008/06/13/clearing-the-ghettos.html
    [4] http://www.tdaxp.com/archive/2008/10/27/cnbc-welfare.html

  15. Zenpundit:

    Would you rather live in a community of 100 % homeowners or one composed of 100% renters?

    If you have a fondness for crack whores and rootless drunkards, choose the latter.

    I’m exaggerating, but not by much.

    Wow. There is wide spectrum of possibilities between 100% home ownership and crackhouse/sexhouse addled renting neighborhood.

    Currently, I rent. It is not next to crackhouse and to the best of my knowledge none of my neighbors (not even that hot stacked blond) are work-from-home sex workers. I also had interacted with rentera in the past as a member of my cities Municipal Fair Housing Board.

    Anyways, my home is in a nice middle-class apartment complex.

    however, I’ve sat on a planning commission and the aggregate mean differences in social behaviors between large aparttment complexes and adjacent subdivisions is staggering. Crime stats for apartment communities are astronomical in comparison.

    I suspect the crime rate for apartment complexes is inversely correlated to the average rent of the complex. Complexes with higher rents (signals middle-class neighborhood or upper class neighborhoods) most likely have less crime the complexes with lower rents. My complex has the same incident of police intervention as the surrounding neighborhoods – almost null. Sadly I must confess I check crime reports every week in the paper.

    Ask any cop in a medium sized or larger town where all their two a.m. response calls emanate from or where they pick up people on warrants from and they will point you to the most run-down rental units in 10 minutes driving distance.

    I suspect home ownership rates are less in run-down neighborhoods. Who wants to own assets that are sure to decline and are at greater risk to be victims of destructive actions?

    By pushing citizens to a greater level home owner ownership then they would have otherwise done, other natural economic choices are forgone. Is the equity that could have been built up outside of home equity less important? I don’t know. Is the forgone geographic mobility forgone worth it? I don’t know. Are the cost to the economy to have a few more percentage points of ownership worth it? Government incentives have partially led to an over supply of housing leading to a drop in value for that own. I have a buddy buy a house at 40% discount to what he considered buying the same house for 12 months ago. Its good for my buddy but suck big time for the current owner.

  16. Half Sigma can over-emphasize his conclusions, but he’s right that many of the things we associate with home-ownership may be partially caused by genetic heritage, socio-economic status during childhood, early childhood, environment exposures, etc.

    IIRC, home prices in general appreciate at the same rate of government bonds, but with much higher volatility. If we wanted to make sure every American was in the ranks of the propertied class, Clinton’s baby bonds idea [1] may be wiser than home mortgage subsidies.

    Harsher police practices along with ending the drug war may do a lot to reduce crime, as well. In other words, a return to the status quo ante Earl Warren.

    [1] http://www.tdaxp.com/archive/2007/09/28/clinton-right-on-baby-bonds.html

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