## Tuesday, September 09, 2008

### McCain's Likely Tax Policy

What kind of tax policy will we get if John McCain is elected President? He says he wants to make the Bush tax cuts permanent. But is he likely to deliver that outcome in the face of a presumptively Democratic Congress? We can get some insight into this question using Intrade betting and some basic rules of conditional probability.

The top income tax rate is now 35 percent. According to the betting at Intrade, the probability that the top income tax rate in 2011 will exceed 38 percent is 0.87. Call this P(tax hike).

Barack Obama has made such a tax hike part of his campaign promises, and there is no reason to think the Congress won't deliver for him. So let's assume Obama is certain to get the tax hike if he wins. That is, P(tax hike / Obama) = 1.0. (If this assumption is wrong, and this conditional probability is less than one, then my conclusion below would be even stronger.)

According to Intrade, the probability of Obama being the next president is 0.53. Call this P(Obama). And P(McCain) = 0.47.

Now we can calculate the probability of a tax hike conditional on McCain winning. It comes from the formula

P(tax hike)
= P(tax hike/Obama) P(Obama) + P(tax hike/McCain) P(McCain),

and plugging in the above numbers. It tells us that

P(tax hike / McCain) = 0.72.

That is, according to the Intrade betting, we are likely to see a significant hike in the top income tax rate even if McCain is elected President.