The Economics of Campaign Proposals

Paul Krugman, in his latest column, writes:

The surprise about the Obama plan is how much in the way of tax breaks it contains, and how much that cuts into the revenue available for other things, especially health care.

What's surprising isn't Obama's tax proposal, but that a great economist like Paul Krugman would be so blind to the economics behind campaign proposals.

Voters want two things when it comes to tax policy: lower taxes and a balanced budget. Thus, a vote-maximizing politician will want a campaign proposal that promises voters both. This is why the Laffer curve was such an effective lie political tool. Both campaigns are emphasizing their tax cuts, so that takes care of promising lower taxes.

How do the candidates promise to balance the budget? Balancing a budget in deficit requires either (1) a small tax hike on a large group of people, (2) a large tax hike on a small group of people, or (3) spending cuts (or some combination thereof). A vote-maximizing politician will want to choose the option with the lowest political cost—that is, the option that will negatively affect the least voters.

McCain has chosen option (3): he's promising to balance the budget by cutting "wasteful spending." To minimize the political cost of option (3), he isn't specifying which government programs will have their spending cut, so he won't lose the voters who use those government programs. Everyone thinks a different government program (which they presumably don't use) constitutes "wasteful spending," so McCain is allowing people to project their concepts of "wasteful spending" onto his proposal. That way, McCain is able to promise voters a balanced budget without explicitly losing any votes.

Obama has chosen option (2): he's proposing to balance the budget by raising taxes a lot, but only on a small group of voters (i.e., the uber-wealthy). To minimize the political cost of option (2), Obama is proposing to raise taxes on the uber-wealthy enough that his tax proposal is portrayed in the media as more fiscally responsible than McCain's proposal. Obama doesn't care that his tax proposal won't balance the budget (given the spending he's promising)—Obama only wants his proposal to increase the deficit less than McCain's. That way, the media will label him as the candidate of fiscal responsibility.

Which campaign chose the better strategy for maximizing votes? It's too early to say. But the Obama campaign got exactly what it wanted when Krugman wrote in his column:

Barack Obama’s tax plan is more responsible than Mr. McCain’s: relative to current policy, the Tax Policy Center estimates, the Obama plan would raise revenue by $700 billion over the next decade, compared with a $600 billion loss for Mr. McCain.

Check-mate, professor.