President-elect Obama reportedly has decided to wait on raising the federal income tax rate for the highest-income Americans. The Bush tax cuts are scheduled to expire two years from now, at the end of 2010, at which time the top marginal rate will shift from its current level of 35% back to its pre-Bush level of 39.6%. Rather than raise the top rate immediately, the Obama administration plans to allow the tax change to occur as currently scheduled.
I’m puzzled by this choice.
Public sentiment surely is not an obstacle to increasing the top rate right away. And economic considerations favor doing so. It’s unlikely to delay economic recovery by reducing consumer spending, since most of those affected will still have sufficient income to be able to spend as much as they desire. The tax-rate increase is small enough that it should have little or no adverse impact on investment; when the rate was 39.6% in the late 1990s, investment didn’t suffer. And the added tax revenues could be used either to boost the size of the stimulus package or to reduce its impact on the federal deficit.
My guess is that political considerations have won out. The calculation must be that this compromise will improve the odds of Obama’s stimulus package getting through Congress quickly. If this calculation is correct, I would go along. The stimulus is surely needed to help get the economy moving again, and the health of the economy is likely to have a bigger impact on the living standards of ordinary Americans over the next few years than anything else. The stimulus package also includes some tax changes that will directly benefit low- and middle-income households.
Yet it seems to me it would have been more useful to hold onto the timing of the top-end tax rate increase as something to compromise on if necessary, rather than give it up at the outset.