Businesses
Among the more prominent elements of his tax proposal, Senator Obama would end the Bush tax cuts and allow the top two tax rates to return to 36 and 39.6 percent.
He also would allow personal exemptions and deductions to be phased out for those with income over $250,000.
The real kicker, though, is that Senator Obama would end the Social Security payroll tax cap for those over $250,000 in earnings. (The cap is currently set at $102,000.) These individuals will then face a tax rate of 15.65 percent from payroll taxes and the top income tax rate of 39.6 percent for a combined top rate of over 56 percent on each additional dollar earned.
High-income individuals will be forced to pay even more if they live in cities or states with high taxes such as New York City, California, or Maryland. These unlucky people would pay over two-thirds of each new dollar in earnings to the federal government.
Barack Obama’s new tax rate would give the United States one of the highest tax rates among developed countries. Currently only six of the top 30 industrial nations have a tax rate for all levels of government combined of over 55 percent.
Under this tax plan, the United States would join this group and have a higher top rate than such high-tax nations as Sweden and Denmark.
The top marginal rate would exceed 60 percent with the inclusion of state and local taxes, which means that only Hungary would exceed Barack Obama’s new proposed top tax rate.
The costs in economic terms of such high taxes are real. For example, of the six countries with higher tax rates than 55 percent, the average unemployment rate is 7.35 percent. This figure includes Denmark, which appears to have a very low unemployment rate of 3.9 percent. However, Denmark spends over 5 percent of its GDP on unemployment programs and benefits, thereby increasing its unemployment rate.
Historically, Barack Obama’s tax rate would be the highest individual tax rate since the Jimmy Carter days. Tax shelters and tax avoidance strategies were common when the top marginal rate was 70 percent or higher.
This new top tax rate will again encourage these gimmicks, reducing investment and economic growth as resources are squandered in an attempt to avoid punitive taxation.
Many individuals will attempt to transfer their compensation from wages to capital gains, since capital gains would only be taxed at 25 percent, or less than half of the top rate on wages. This would put a great deal of pressure on a company to do anything it could to make its stock quickly increase in value.
Other individuals would try to incorporate so they could pay business taxes instead of having to pay taxes on their wages. Again, these resources would be diverted away from more productive uses and slow the economy.
High tax rates also encourage capital and income flight to lower-taxed areas. There is ample evidence in the United States of individuals and businesses moving to states such as Florida or Delaware to take advantage of their tax-friendly laws.
A higher federal tax rate would encourage individuals to move assets abroad to take advantage of lower tax rates in countries such as Canada, France, and Great Britain.
These high tax rates could also have a large impact on the labor force. Many workers could choose to reduce their hours or simply retire in the face of such high taxation.
Economists usually argue a great deal about what effect minor changes in the tax code will have on incentives to work. However, the Obama plan calls for a tax increase so large that economists will be focusing on the harm to the overall economy rather than just the isolated effects on labor and on capital.
Perhaps a larger worry than the damage to the economy is the long-run budget problem of the United States. While Senator Obama raises taxes a great deal on upper income individuals, the overall tax plan increases the national deficit.
As a result, the country will be even less prepared to pay for current and future Social Security and Medicare obligations. When money is needed to pay for those programs, it will be hard to tax the rich even more, given that the top rate will already be so high.
Instead, in order to pay the government’s spending and entitlement shortfalls, taxes would fall most heavily on middle-income Americans. After all, even successful taxpayers are not an infinite source of revenue.