Thursday, July 10, 2008

The Problem with Obamanomics

Betsy points out that in any tax scheme that looks to "soak the rich" usually ends up hitting the middle class much harder. Right now, the top 1% of tax payers pay about 39% of the income tax in America, if you raise the tax rates, those 1% will pay for lawyers and accountants to look for ways to shelter their money so that it is not taxed. The result, as Betsy notes, is that the upper middle class and the middle class will end up shouldering more of the general tax burden without the concomitant means to avoid taxes.

So instead of investing money in operations that would bring about a greater rate of return than tax shelters when the upper tax rate is higher than some fixed point, the rich will simply shelter the money and take a lower rate of return.

That is why you get the economic conundrum of if you cut tax rates you get more tax revenue, but if you increase tax rates you get less tax revenue.

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