Obama’s self-defeating war on the wealthy

July 16, 2009

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.

8 comments

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[...] Obama’s self-defeating war on the wealthy – James Pethokoukis [...]

is it time for another Tea Party?

Posted by Bryan X | Report as abusive

I’m an international tax lawyer and I work with precisely these people. People who intentionally evade taxes are (by definition) not easily spooked by scary talk from the IRS. I doubt you’ll see a significant number of prosecutions. But regular people are spooked by the IRS. My current plate-load of amnesty applicants are for the most part normal people with (relatively) trivial tax liabilities. The IRS is hunting for whales and netting herrings. At least the compliance statistics will look good when the IRS issues its press release. “FBAR filings up 27%!” LOL.

On the inbound side I can point to money that has decided not to enter the U.S. for investment purposes due to U.S. tax policies. In particular I’m thinking of is a very large real estate development that is not happening here in California at a cost of hundreds of construction jobs followed by many, many permanent jobs. Yay bureaucrats.

We are looking at the 21st Century equivalent of the Smoot-Hawley mistake. I don’t mean to be partisan about this. Politicians from both parties seem to have missed the point when they took Economics 101. If they took it at all.

Thanks,

Phil Hodgen
@philiphodgen

The premise is rediculous. These 52,000 are suspected tax cheats. And going after them is supposed to be some sort of proxy for class warfare?

Nah. More like a workfare program. We’ll need lots of new white collar jail cells if Obama gets this right. And last time I checked, most inmates suffer a rather large drop in income. Hardly fertile grounds for funding new government expenditures.

Posted by Benedict@Large | Report as abusive

Someone help me here. How does a 5.4% surcharge on average income of $2,300,000 net $280,000 in tax liability?

Posted by Lycurgus | Report as abusive

Benedict… tsk tsk
Who said they were tax “cheats?” They are following the laws as set forth by domestic and international cooperation, as well as heeding the advice of their lawyers.
Just throwing stuff out there bennie? Typical.

Posted by what? | Report as abusive

Mmmm…do you think Ted Kennedy as all his money over there??? How about some of these other rich politicians…wonder where they got their money held. Oh…wait…that’s right they are politicians…they don’t have to pay taxes.

Posted by Jeff Jungwirth | Report as abusive

So, once again a leftist is trying to get the goose to lay more golden eggs by beating it with a baseball bat. Gee, I wonder how that will work out in the end.

Posted by Odysseus | Report as abusive

Lets look at this another way. The government raises cigarette taxes. That’s good right?

Well, a funny thing happens. People decide they are going to smoke less or quit all together. Revenue drops. Yes, cigarette taxes pay for social programs.

Then what? Well you can’t raise taxes more, you can’t raise taxes on the company, so what next?

Nothing.. it ceases to be a profitable tax to pay for those social programs.

Same thing happens when you raise taxes on the wealthy, sure they will still continue to remain wealthy. They will simply find ways around the taxes, they will move to other countries, or decide to invest less. They can still be filthy stinking rich they just lose their incentive to spend more and get even richer!

And those making 2 million or more per year. Well, they simply make less than that. Does the wealth go somewhere else? Do the middle class benefit?

NO

It goes to the lower classes that rely on social welfare. They simply remain consumers..they do not create jobs they maintain jobs.

Raise taxes on the rich, it trickles down to the middle class because the government eventually needs to find more sources of revenue.

Enjoy your money and freedoms while they last. I’m already poor by most peoples standards with no kids, and no real debt. But I fear for those who make it possible for me to make as much money as I do.