Calculate Emptor

By :: October 30th, 2008

Have you seen the new tax calculators produced by the Obama and McCain campaigns?

The idea is simple enough—make tax real for ordinary voters. Instead of talking about trillions of dollars or  95 percent of working families, describe what an Obama or McCain presidency would mean for real taxpayers.

A laudable goal, indeed. But it turns out that these calculators do little more than show how wildly misleading this sort of numbers-crunching can be.

Obama has produced a slick interactive calculator. Trouble is, it shows what would happen if you filed your 1040 on a postcard, which you probably don't. Those with more complex financial lives have no way to build in capital gains or dividends, for instance.

Also, if you say you are making more than $250,000, you don't get a comparison of how you'd do under each plan. Instead, you are told, "You will probably not get a tax cut under the Obama-Biden plan."  Thanks for that.

McCain's version is not interactive, but purports to show the impact of each candidate's tax cuts on ordinary people—families making between $35,000 and $55,000 in wage income. You won't be surprised to know that each example shows families far better off under McCain than Obama.

But let's look closely at one example: A two-parent, one-earner family with two kids, making $42,000 and taking the standard deduction. The calculator shows this family getting a tax cut of more than $5,000 under McCain if it gets $8,000 in employer-sponsored health insurance and a tax cut of almost $6,000 if it does not. In either example, according to the McCain calculator, this family would get only $737 under Obama.

So, is Joe the Plumber right after all? Would working stiffs do better under McCain than Obama? Well, no so fast.

It turns out the typical family McCain chose to profile isn't so typical at all. We ran these characteristics through the Big Computer here at TPC and discovered that, in fact, of families making between $40,000 and $50,000, only one out of every 564 look like the happy household McCain carefully chose. That's about 7,000 tax filers. The Cleavers, it happens, live only on cable reruns.

Change just a couple of variables and the story is vastly different. Let's make them a two-earner family, and give them the average amount of mortgage interest, as well as education and child care expenses for families in their income class. What happens? Low-and-behold, they'd get no tax cut at all from McCain and more than $6,000 from Obama.

Keep in mind, too, that these TPC estimates exclude the promised health care subsidies of each campaign. So does the Obama calculator. McCain's includes the benefit of his refundable health credits, but ignores the Obama health subsidies. 

This doesn't suggest that McCain's numbers are wrong. It does show how he carefully chose his examples to show his tax plan in the best light.

The lesson here is be afraid, be very afraid, of all of these crude calculators. TPC tries to avoid these problems by showing what percentage of people in each income group win or lose under any given plan. Tax law is, sadly, immensely complicated, so using these online devices to try to estimate what a tax proposal means to you is a dangerous game. Especially if they come from those with, let us say, some self-interest in the results. Calculate away, but calculate emptor.

4Comments

  1. Anonymous  ::  1:55 pm on October 31st, 2008:

    At Economists for Obama we link to the campaign's tax calculator. I think one could fairly say that it's accurate in terms of the numbers but gives a partisan presentation, e.g. if you earn $250K it tells you that you won't get a tax cut under Obama's plan, rather than telling you your taxes will go up.
    I'm surprised you didn't mention the calculator at ObamaTaxCut.com, which is just an interactive version of three Tax Policy Center tables. We discuss the calculator and link to the relevant tables here.

  2. Anonymous  ::  5:16 pm on November 1st, 2008:

    Regarding ObamaTaxCut.com, if the TPC has any criticisms in how I present your data, please let me know at zach at alchemytoday.com.
    Specifically, looking at your reports I decided that combining the estimated change in income and corporate tax was the ideal way to summarize your data in the simplest possible fashion. As an Obama supporter, there's an inclination to leave out the corporate tax change. However, the summaries of your data reported in the popular press this summer include this in the change in after-tax income.
    I think I picked the most faithful way to distill your reports into a single number for casual audiences, but any criticism is welcome. I try to include the necessary caveats and link to the appropriate TPC documents.
    Regarding the Obama tax calculator, I think it's somewhat laudable for their campaign to go beyond the usual tactic of cherry picking families that are actually outliers when comparing the two candidates' plans and open up the floor to plug in whatever you want. It's at least a step in the right direction, although omitting results for incomes above $250,000 is unfortunate.
    Lastly, your link to taxcut.barackobama.com above is broken.

  3. Anonymous  ::  5:40 pm on November 1st, 2008:

    I fixed the link. Thanks for pointing out the glitch.

  4. Anonymous  ::  8:25 am on March 16th, 2010:

    Indeed, the link is working now. The ObamaTaxCut calculator has proven to be quite a useful tool. It never failed me and I really think it can help others calculate their taxes as well.
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