Friday, February 27, 2009

War on the rich in America

Some folks act like increased taxes are a war on the rich.

President Obama proposed to hike the top two tax brackets. Tax brackets work incrementally. If you are in, say, the now 35% bracket (soon to be hiked to 39.6%), every dollar you make above the limit for that bracket is taxed at 39.6%. Additionally, capital gains taxes are being increased and deductions for charitable contributions and mortgage interest are being decreased.

The mortgage interest deduction, by the way, favors the rich. Americans get a standard deduction of about $5,000 per individual. You take your gross income and subtract the standard deduction, and then your tax brackets apply. People may also itemize deductions, meaning that they'd add up mortgage interest, charitable contributions and other allowable deductions. You can see how the mortgage deduction, then, is regressive - the more house you have, the more you get to deduct.

Either way, Americans making over $250,000 stand to see a tax hike - possibly a significant one. The New York Times has a couple of interviews with some folks who make about or over $250,000.

One guy said that the national situation was dire enough that he'd suck it up.

One guy said "socialism." One woman asked, "I don't believe in giving money to people who can't afford to buy a house. Why should we pay for someone who is irresponsible?" Another woman asked, "I work 10 to 12 hours a day. What is the reward for someone like me to work harder?"

To be fair, $250,000 means quite different things depending on where in the US you are. In New York, Washington DC or Boston, for example, it's not that much money (although it's hard to starve on that much). In addition, Americans pay state and local taxes on top of Federal ones, and they can be quite high. In the Southern states, $250k is quite a bit more, and state and local taxes are lower.

In addition, it is not good to raise taxes in a recession. Progressives should not ignore the fact that tax hikes will reduce personal spending and investment - both of which can prolong recessions.

That said, I have little sympathy for the folks who cry socialism or who try to complain there's some sort of war on the rich. The opportunities to make money in the United States are tremendous. Even in Europe, where the "socialism" canard is more applicable, the opportunities are tremendous. If you think a few percentage points of tax hike somehow takes away your incentive to work, then you don't have to work.

PS: I believe the tax increases are only scheduled to start in 2011 anyway. Granted the US economy may still be in recession, but it's likely to be in better shape than today.

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