David Bernstein notes that the effect of the Obama tax plan would be to raise marginal tax rates above 50% and in some states it could be as high as 60%.
Obama is playing to his liberal type by exploiting the politics of envy to try and “soak the rich,” but in terms of actual policy, to do so would be economic suicide. It would encourage people to either A:) work less and be less productive or B:) shield their assets from taxation. (Or perhaps a combination of the two….)
The fact is that $250,000 is hardly filthy rich these days. The people that Obama will hurt with this punitive taxation will be the small business owners that employ 50% of the American workforce. They will be less inclined to grow their businesses and less inclined to hire new workers—because the marginal utility of the extra work just went down dramatically. If the benefit of working 10% harder is a 2% increase in income after Uncle Sam takes his bite, it makes little sense to work harder. Because of that, we lose the benefits of that extra labor.
The bottom line is this: it will become much more difficult for people in the middle class to move up the socioeconomic ladder. For Warren Buffet or Bill Gates, an army of lawyers and accountants can shield income while the boss pats themselves on the back for their “social responsibility.” For the average owner of a small flower shop or coffee house who can’t afford those kind of tax shelters, it means that moving to that next level is more of a curse than a blessing. For an economy that is based on the promise of upward mobility, such punitive taxation is anathema.
Obama’s plans make no economic sense. Instead of shoring up entitlements, he would dramatically expand them. For all of the talk about how McCain is a clone of Bush, Obama seems to want to take the worst policy ideas of the Bush Administration (Medicare Part D, steel tariffs, more government spending) and do more of it.
Obama is running as a doctrinaire Michael Dukakis-style tax and spend liberal. Even though this is unquestionably a Democratic year, a lot of voters will be smart enough to see that Sen. Obama seems to want to punish those with the audacity to hope to build themselves up economically.