Obama’s self-defeating war on the wealthy
The push by the Justice Department, along with the Internal Revenue Service, to compel UBS to fork over the names of some 52,000 American taxpayers with banking accounts in Switzerland may produce an important benefit for the Obama administration — or so it might think. How so? Those presumably wealthy 52,000 taxpayers, along with some two million other upper-income Americans, can be drafted to help pay for U.S. healthcare reform.
Under the $1.2 trillion plan passed by the Democratic-controlled House of Representatives, the wealthiest 1.2 percent of U.S. households would have to pay an additional $540 billion in taxes over the next 10 years via an income surtax of between 1 and 5.4 percent.
For the super-elite, those in the top 10th of 1 percent (and presumably the type of taxpayers who have Swiss bank accounts), that works out to an additional $280,000 a year in taxes on an average annual income of $2.3 million a year, according to the Tax Policy Center. If it wasn’t for those record earnings, office corridors inside Goldman Sachs would surely be overflowing with tears today.
Then again, maybe not. The wealthy have the means to manipulate tax laws to their advantage through various — sometimes outlandish — tax sheltering strategies. As Howard Gleckman of the Tax Policy Center puts it, ‘The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.’
And just as the ‘financial innovation’ of recent years took a terrible economic toll, so might this next wave. Not only is Uncle Sam unlikely to raise as much money as he expects — thereby forcing the government to push surtax rates even higher — but more and more capital allocation decisions are likely to be driven by tax considerations as opposed to economic return.
This is why tax reformers prefer lower rates with fewer deductions as a way of raising revenue. There is far less economic distortion that way. The Tax Reform Act of 1986, for instance, slashed the number of tax brackets from 14 to 2, winnowed the top marginal rate from 50 percent to 28 percent and eliminated many tax sheltering strategies. The House bill would increase the number of brackets to a post-1986 high of nine while raising the top rate to 45 percent.
Surely the Obama administration must know this sort of thing makes for terrible tax policy, though it would create more jobs for certified tax planners. As Obama himself wrote in the “Audacity of Hope”: “The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions — and did lead to the wasteful industry of setting up tax shelters.”
Faced with huge and growing budget deficits, the White House and congressional Democrats needed to pay for healthcare reform in the worst way. And that’s just how they did it.