President Obama’s Taxation Morass

President Barack Obama’s opening gambit in the “fiscal cliff” dealings was a package of tax increases totaling a little less than $1.6 trillion in additional revenue over ten years. If Obama was trying to erase an image of being a very poor negotiator, who makes major concessions at the very beginning of the negotiations, he has already rhetorically abandoned his gambit and is only demanding a rate hike for the top two percent of taxpayers in order to make a deal. Reports are now circulating that Obama may not demand a tax rate hike from 35 to 39.6 percent but will settle for less — maybe 35 to 37 percent for the top two tax rates.

According to Donald Marron, head of the Tax Policy Center, raising the 33 percent rate to 36 percent and the 35 percent rate to 39.6 percent would raise an additional $442 billion over ten years. If Obama accepted an increase of the current 33 percent rate to 35 percent and the current 35 percent rate to 37 percent, it would raise in the range of $200 to $225 billion over ten years, a mere blip in the accumulated deficit.

Should Obama get Republican lawmakers to agree to any increase in the top two marginal tax rates, it would be considered to be a political victory for Obama but it would be a loss for the nation, because it would represent a clear disconnect with the fact that income is so heavily concentrated among the top few percent of taxpayers. High income taxpayers would be severely undertaxed and the revenue burden would need to fall elsewhere.

After World War II, tax rates far higher than today’s rates existed alongside strong economic growth. Also, the study over a 65-year period by the Congressional Research Service found that high tax rates were associated with savings, investment and productivity growth. When top marginal tax rates are high, as in the first three decades after World War II, there is an incentive for business owners to lower their taxable income by adding to their facilities and/or hiring more workers.

President Obama has put $600 billion in spending reductions on the table. Cuts in Medicare and Medicaid are included, although Social Security is at least tentatively off the table. If cuts are made to current recipients of federal government spending, if would be a repudiation of Obama’s current argument that middle-class taxes can’t be raised, because the money is needed to purchase the basic necessities of life.

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