There are two schools of thought when it comes to creating the optimal tax structure for our country. First, there’s the idea that there should be a very low income tax rate across a wide base of people. Meaning, everyone pays, but everyone pays very little. The second idea is that people pay according to their income. Rich people pay more than poor people.

The overriding philosophy of the first idea is that everyone benefits from living in our country so everyone should pay. But because our economy is built on capitalism, it’s understood that tax rates above a certain amount can be anti-growth and counterproductive. Therefore, low tax rates means the least amount of hardship on taxpayers and strong economic growth that provides unlimited amounts of prosperity.

The philosophy of the second idea is that because rich people have benefited the most from our economy, they should pick up the tab for those who have been less fortunate. Fairness of outcomes, not overall economic growth, is the main goal. This idea is promoted by Senator Obama who wants to increase taxes on America’s wealthiest so that he can provide targeted tax relief to “95% of working families” as he likes to say.

The problem with Obama’s plan, and the “fairness first” philosophy is that it creates perverse incentives. Obama boasts that millions of Americans won’t have to file taxes at all under his plan. He’s right. According to the Tax Foundation, 16 million more Americans won’t have to file taxes if Obama gets his wish. That would mean 44% of all tax filers wouldn’t have any tax liability. So what’s to stop those 44% from demanding bigger and bigger government from the remaining 56% when they know they don’t have to pay for it? In fact, because Obama is proposing refundable tax credits instead of tax cuts, millions of people will get a check from the government every year. So they actually make money by increasing the size of government. That’s not a good idea.

Second, we know from basic economics that our country operates on two things - capital and labor. By wanting to tax the wealthy, Obama is taxing the very people who provide capital in our economy. The capital that builds factories, creates new businesses, and expands innovation into new markets. By punishing the wealthy, Obama is retarding economic growth.

Finally, the graduated tax code under the Obama proposal creates a high demand for lobbyists, accountants, and lawyers. Knowing that different people are treated differently by the tax code, they will seek more line-items and provisions to be added to the tax code to benefit their clients. This pushes government to become bigger and bigger, which results in an economy that is unnecessarily held down. That means less wealth, less innovation, and a suppressed standard of living.

In the end, Obama’s tax plan is not smart economics, and it will do more harm than good.

This entry was posted on Tuesday, October 14th, 2008 at 3:36 pm and is filed under Politics, Economy/Budget .