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Rich Shouldn't Get Overwrought

A Commentary by Froma Harrop

Thursday, March 05, 2009

Amid pleas to spare the rich, the right is accusing the Obama administration of waging vile class warfare. They envision wooden carts carrying the wealthiest 2 percent to the guillotine. Are the critics right? Only in the tumbrels of their mind.

What the administration proposes is more like charging for cocktails in the first-class cabin. Let's take our Valium and look at the Obama tax proposals with calm nerves.

The president wants to raise the top tax rate to 39.9 percent starting in 2011 (when the economy is presumably on the road to recovery). That was the highest marginal rate at the end of the Clinton administration. From all the garment - rending, you'd think that the top rate was being hiked up to 90 percent, which is where that famous socialist Dwight D. Eisenhower left it.

One of the tax-a-phobes' favorite tactics -- a gotcha for Democrats -- is to reference John F. Kennedy's tax cut. They hail it once an hour. But they always neglect to note what the sainted JFK lowered the top rate to. He lowered it to 70 percent, which is 30 percentage points above the tax rate that Obama proposes.

A stronger argument might focus on Obama's plan to also limit income tax deductions for high-earning families -- including for charitable contributions. That's problematic.

Obama talks of raising the capital-gains tax rate to 20 percent from the current 15 percent for families making $250,000 or more a year. A "War on Prosperity," some declare.

Well, there you go again. Ronald Reagan inherited a 20 percent capital-gains tax rate, then raised it to an effective rate of 28 percent for high-earners.

The thinking went as follows: The top rate was being slashed to 28 percent from 50 percent. Well-off Americans should not get yet another tax break on their investments. Thus, capital gains would be taxed as ordinary income.

Linda Beale, a tax expert at Wayne State University Law School in Detroit, prefers Reagan's base-broadening approach. "It eliminated loopholes, lowered rates and removed the preferential rate on capital gains," she told me. "That was the right solution."

By the way, Obama is not actually raising taxes. He's letting the Bush tax cuts expire. President Bush and Congress could have made them permanent but did not. The legislation purposely canceled the cuts after 10 years to hide their enormous long-term cost.

"Republicans who used the sunset gimmick to justify the big Bush tax cuts knew at the time that they would argue that opposition to making the temporary tax cuts permanent was support for a tax increase," Beale said.

Sure enough, the arguments have arrived, right on schedule.

I would quibble with parts of the Obama tax plan. The president told Americans last month, "If your family earns less than $250,000 a year -- a quarter million dollars a year -- you will not see your taxes increased a single dime."

That's not wise budgeting. It's OK to raise taxes on the elite earners most blessed by the Bush tax cuts. But the huge deficits in our face require that the middle class pay at least something more in taxes. Americans have to be in this together.

Even low-income people can't be left out. Extending new tax credits to low-earners made sense in the stimulus package. But Obama wants to make them permanent, adding to the deficit.

The bonus for the economically insecure should be universal health coverage and money for a college education. And wealthy folk will surely benefit from financial markets kept sane by sound federal budgeting and smart regulations.

The rich can keep their heads -- and may they prosper another day.

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