Tuesday, January 13, 2009
During the presidential campaign, Barack Obama portrayed his tax plan as a way to help "spread the wealth around." That was an unfortunate choice of words, though not as silly as the "conservative" formulation that raising taxes "punishes success."
The object of taxation is not to spread the wealth and certainly not to penalize people who make a pile. Stripped of melodrama and self-pity, the goal of tax collection is boring: to pay for government. The word "conservative" was put in quotes because real conservatives generally oppose running up debt to foot the bills.
The conservative alternative to borrowing -- a cut in spending -- is now off the table as the need to stimulate the economy grows dire. In any case, Republicans held the presidency and congressional majorities for most of this decade, and they failed to make even modest inroads in federal spending. On the contrary, their leadership floored the acceleration pedal -- pushing through a Medicare drug benefit made more expensive than it had to be and costly wars with no plan to pay for them. Even before the Wall Street meltdown turned on the bailout bucket brigade, the Bush administration projected an annual deficit approaching $500 billion.
So "conservatives" had a chance to cut government, and they blew it. This failure doomed the theory that chopping taxes would "starve the (government) beast" of revenues and thereby force Congress to slash spending. Real conservatives recognize this reality, and many now contend that taxes must be raised.
The questions, then, are when should we raise taxes and who will pay the higher bill. An easy option for an Obama administration is to let some of the Bush tax cuts disappear on schedule.
For example, the 2001 tax law was cleverly written to gradually reduce the levy on big estates to zero next year, then restore the Clinton-era rules in 2011. That accounting gimmick let the Bush administration depict the cost of the cuts as much smaller than they would have been had the reductions been made permanent. It assumed that Congress would later rush in to nail down the repeal of the estate tax.
Obama's plan for the estate tax -- or in "conservative" parlance, the "death tax" -- is to freeze it at this year's level. Right now, the amount of an estate exempt from taxes is $3.5 million, or $7 million for a couple. The rest gets taxed at 45 percent.
As a result, fewer than two out of every 98 estates will face any tax this year. And larger estates will collectively pay $324 billion less in taxes than they would have in the Clinton era. Back then, estates larger than $1 million were taxed, and the rate was 55 percent.
Given the political tooth-pulling required to raise taxes, Obama would do well to drop his plans for an immediate middle-class tax cut. If the president-elect wants to stimulate the economy, he can spend more money on bridges, education and other public investments. There's no guarantee that the middle class would take their tax savings and buy stuff. All but the poor are more likely to save the money.
And while the tax code can change incentives for investing, the notion that economic growth depends on low taxes is not borne out by history. The top marginal income-tax rate in the Eisenhower years was 91 percent -- as opposed to 35 percent today -- and the economy boomed.
Raising taxes may be foolhardy in this sick economy, but Americans should recognize that eventually the bills must be paid. And taxation is how it's done.
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