Wednesday, June 18, 2008

Obama's Tax Plan

Some news came out today about Obama's tax plan. It's a populist approach that should knock the socks off the republican's "He'll raise your taxes" argument. Obama basically said that if you make less than $250,000, you don't have anything to worry about. That idea is going to appeal to many folks that like him but worry about their wallets and are tempted to stay with the republicans. It's going to upset those who are high earners, but that doesn't bother me at all. I'll tell you why.

The first reason is that for the past 30 years, income tax progressivity has been eroded significantly. The income tax rates paid by high earners have come down, the capital gains tax rates have come down, and the estate tax rates have come down. At the same time, rates for the middle class have not come down at anywhere near the scale experienced by the high earners. The underclass, which never paid much in taxes, has benefitted from credits (refunds of tax not paid), but this new income has not done much in terms of offsetting the higher cost of living for them. While it's true that a large percentage of the total tax is paid by high earners, they still have a lot more left over for themselves than they once had. They can clearly "afford" to pay more.

The second reason is that many of these high earners have benefitted from the huge increase in executive salaries compared to salaries in general. A professor in my MBA school once said, "Don't ever forget that, these days, the main purpose of the corporation is to benefit senior management." As a financial executive in a major corporation I witnessed rampant profiteering by the top people. In my view, they are simply employees like any others and often do not earn the huge salaries and bonuses they collect. They are not "owners" with their own skin in the game. If they had to pay 45-50% of all earned income over a very high number (say $1 million), it would not bother me at all. They'll still have plenty left over.

You'll hear arguments that high tax rates on the wealthy will harm our economy by reducing investment. Baloney! Investments follow risk-adjusted rates of return, and there is plenty of money in corporations and in other countries. The reduced-investment argument violates the principles of economics. Secondly, the economies of many European countries and Japan do very well dispite lower executive salaries and higher tax rates, which shows the fallacy of this argument.

In closing, I want to reiterate my position on the major redistribution of wealth that has taken place in the U.S. over the past 30 years. Reductions in income and estate taxation on the wealthy have created a large new class of super-rich that resemble the aristocracy of old time Europe. People like Warren Buffet have warned that this is a major problem. We don't need a class of people who are permanently wealthy regardless of their ability or contribution to society. Obama's tax plan is one way to put the brakes on this dangerous trend. Go, Obama!


ThomasLB said...

The American economy grew at its fastest rate during the Eisenhower administration, when unions were strong and taxes on the wealthy were high.

Sonja's Mom said...

Thank you for this explaination of Obama's tax plan. I had not heard this before and feel much better about him. I agree with you completely about executive's salaries. There are only so many hours in the day and one can only work so many of them. What makes one man's work that much more valuable than another's?

Ron Davison said...

If you were hiking in a group, some people would do well just to carry their own weight and others could help to carry a bigger portion of the load. Whether you are talking about physical ability or monetary ability, the same principle applies. Progressive tax rates just make sense and, as you've said, the degree of progressive tax has eroded to the point that the little old ladies and the young studs (or, rather, the poor and the rich) are carrying about the same burden up the hill. Hurrah indeed for a change. (But then again, what would Buffet know about investments?)