A friend of asked me why I hadn’t tackled this topic as the elections loom in a few weeks.   I didn’t have a good answer.   Taxes are definitely up my alley, and I’m more than interested in the outcome of this election.

In the interest of full disclosure before I proceed, I want to state I’m voting for Obama.   I have a great deal of respect for McCain and many of the policies that he supports and has supported, but have been incredibly disappointed in the direction of the Republican party over the last 8 years.

Highlights of the Obama Plan

  • Repeal Bush Tax Cuts on the top two tax brackets (Both Income and Capital Gains)
  • Dividends will be taxed at 20% for those making over 250k
  • Keep Estate Tax that is set to expire 2010, though with a higher exemption

Some Highlights of the McCain Tax Plan

  • Keep and extend all the Bush Tax cuts
  • Reduce Corporate Tax Rate to 35%
  • Doubling Personal Exemption from $3500 to $7000

On of the better representations comparing the plans is on the Freaknomics blog.   McCain can say that his tax plan will lower taxes for the American taxpayer.  Obama can just as easily say that most Americans will pay lower taxes under his proposal.  Speaking points don’t tell much of a story, and nor do statistics if they’re not given a context.    Tax rates cannot be taken out of context income distribution, and more importantly changing income distributions.  Republicans are correct in pointing out the tax burden born by the rich has steadily increased, but that is more a reflection of the fact that money has accrued to top income earners.   The fact is that the “Rich” are paying more in taxes despite having their taxes lowered.  At the end of the day, it’s still better to make more and pay more taxes than it is to make less money and pay less in taxes.

Personally, I’m proponent of keeping taxes as low as possible as long as we get the services we need and don’t run a deficit.  It’s debatable if we’re doing too little or too much of the former, but there’s no question that we’ve failed on the second measure.   As much some people may want to believe that cutting taxes increases government revenue by increasing total GDP, this is not theoretically supported, and empirically ambiguous.

I do believe cutting too high a marginal tax rate can increase tax revenues by spurring economic growth to degree that overall tax revenues do increase, I do not believe that U.S. anywhere near these tax rates.   I have a hard time believing that increasing the marginal top tax bracket back to 39.6% (Pre-Bush) vs 35% (Post Bush) changes the behavior of tax payer so much that tax revenues actually decrease.   Let’s say for example I made $350k of which $200k would be taxed at the higher marginal rates.  I would have to choose make $363k to pay the same in taxes at the lower tax rate to make the tax cuts pay for themselves.

I imagine there is some income retardation for high income earners, but I certainly have never met a lawyer who makes $350k who seems to actually have choice to work less….

I hardly think Obama’s plan is perfect.  My biggest problem with it is does nothing to actually simplify the tax code.   On the surface tax code simplification might seem like a small issue, but in truth I think it’s the biggest issue.   A complicated tax code leads to more abuse.  Tax loopholes rewards those with good lawyers rather than the deserving.

Ultimately, I rather pay higher taxes now to get the country back on track.   Balancing the budget will require both spending cuts, and tax increases.   While political partisans on the left hate cuts in spending as much as the extreme right hate taxes, the pragmatic center (of whom I’d like to think I belong amongst) realizes that both are necessary.