Theoretically, imposing high taxes on the rich is a handy way to acquire additional tax revenue with minimal political fallout. As a small minority assailed by class warfare and wealth envy, few object to steepening our progressive taxes. Apparently, the repugnance of voting over what to do with a minority’s property- two wolves and a lamb debating dinner plans – is lost on the electorate. The votes of those few disenfranchised rich men and women – as well as their finances – are expendable when pandering to the mob.

The Framers were so afraid of such a factional apportionment of taxes that income taxes were ruled “unconstitutional” until the 16th Amendment. James Madison – “The Father of the Constitution” – wrote that, “The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number is a shilling saved to their own pockets.” Indubitably.

Liberals believe that higher tax rates yield higher tax revenue. This fairy tale is what makes a steeply progressive system so appealing to the Left; the wealthy few will endure exorbitant taxation, fully funding the government’s agenda. Thus, when presidential candidate Barack Obama fantasizes about repealing the Bush tax cuts and uncapping Social Security taxes, he naively believes that this will increase Federal tax revenue, as if people do not react to positive or negative incentives.

Sadly for the liberals, the rich are not an endless fountainhead of wealth; they respond negatively to punishing tax rates. Often, they simply work and earn less, spend less on capital assets, and decrease or eliminate profit dividends. This contraction of economic activity yields less tax revenue for the government.

The IRS recently released 2008 income statistics, and much of the information is typical of any progressive tax. However, the data also happens to disprove the simplistic notion that higher tax rates increase tax revenue, and that individuals do not respond to punitive taxation. This is a basic argument of supply-side economists, illustrated beautifully by the Laffer Curve below:

<%image(20080806-untitled.jpg|320|251|The Laffer Curve illustrates the consequences of positive and negative tax incentives)%>
The grayed area is the “prohibitive” tax rate, where taxes begin to constrict economic activity, and thus decrease government revenue. In this area, revenue can only be increased by lowering tax rates.

Note: the ideal tax rate is not necessarily 50%, as this curve seems to imply. Rather, it varies according to the values of the electorate. A dramatic reversal of Bush’s tax policy would undo the prosperity enjoyed by the private sector and government (i.e. growth and revenue windfall), and would shift the U.S. deep into prohibitive levels

The top 1% of taxpayers ($388,806 or above) pay 40% of Federal taxes, though only receiving 22% of total income. The top 10% ($108,904) paid 71% of Federal taxes. Overall, the top 50% paid 97% of the tax share, and the remaining 50% paid roughly 3%. Given these statistics, it will be difficult for Obama to honor his promise of reducing the bottom 50%’s puny tax share.

The statistics chart a dramatic increase in Americans who declared an income of over $1 million. Three years after President Bush’s 2003 tax cuts, millionaires doubled from 181,000 to 354,000. Lower tax rates (even a small difference of 35% from 40%) are powerful incentives to work harder for more money, explaining the surge in $1 million salaries. In 2003, millionaires paid $136 billion in taxes; in 2006, bolstered by the “new rich,” of Bush’s tax cuts they paid $274 billion. So by lowering taxes, President Bush created an extra $138 billion of taxable income.

Lowering taxes on capital gains and dividends ensures similar outcomes. At a favorable tax rate, investors will declare more capital gains, and businesses will distribute greater dividends. An increase in declared capital gains or distributed dividends is also an increase in tax revenue. This truth – that people respond favorably to low taxes and unfavorably to high taxes – voids the liberal lamentation of the rich escaping their “fair share.”

Despite the obvious benefits to low tax rates, Obama has outlined an enormous tax increase on income, capital gains, and dividends. His tax vision would return the United States to the 1970s, the age of creeping stagflation. Then, the top income tax rate was 70%, yet the richest 1% paid only 19% of Federal taxes, rather than the 40% that they pay today with a top rate of 35%. Apparently, “change we can believe in” is a destructive repeat of economic contraction, ballooning inflation, and high taxes. “Yes we can,” but do we really want to?

OBAMA’S TAX VISION
Top income tax rate: 39.6% from 35% (not including state income taxes)
Top income tax rate w/ uncapped payroll tax (not including state income taxes): 52.2% from 37.4%
Capital gains tax rate: 28% from 15%
Dividends tax rate: 39.6% from 15%
Estate tax rate: 55% from 0%

Say you’re a small businessman with a $500,000 salary. Obama would take approximately $160,684 from you in income taxes. However, after factoring in his uncapped FICA “contribution” (12.5% on all marginal income over $250,000), you pay an extra $30,000, totaling $190,684 in Federal taxes alone. Say you live in California, where a top income tax rate of 12% on all marginal income over $100,000 pushes your tax bill to $238,000. Your business has an average profit of $2 million, but combined Federal and state corporate tax rates take $860,000, leaving $1.4 million for dividends or capital investment. Discouraged, you decide to sell your capital assets – business and home – and retire to a low-tax state like Texas. Your business sells for $10 million, and your home for $1 million. You pay 28%, or $3.08 million to the IRS. You become suicidal after losing your successful business and beautiful California home, but realize that suicide would void your life insurance policy; you can’t afford to kill yourself. When you finally die, your estate is valued at $7 million. Your will divides that $7 million equally among your two children. Each must pay an estate tax of 55% on their $3.5 million – $1.925 million.

However, such economics are irrelevant to Obama. He uniquely views taxation as a weapon to punish the rich, rather than as a means to collect revenue for the government. Constricted economic activity, less tax revenue, and widening deficits are acceptable casualties in his war against America’s wealthy households. He fashions himself as “post-partisan,” but is slavishly devoted to petty politics of wealth envy and class warfare.

Do not let Obama drive his punishing wedge into the economy.

<%image(20080808-obama.jpg|498|300|Obama preaches on the mysteries of the "fair share" tax rate)%>