Why Wait to Raise Top Tax Rates?

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.

3 thoughts on “Why Wait to Raise Top Tax Rates?

  1. Well said!


  2. The supposed rationale/justification for tax relief on economic rent (most very high incomes are unearned economic rent) is that the private sector does a better job of investing that does the public sector. What is quite amazing to me is that the last 30 years seems to disprove that fundamentalistic binary stupidity. the erstwhile “private sector” has invested everywhere other than the United States and the results have not been pretty.

    The ivory tower supporters of the rich (otherwise known as the neoclassical economists) will cherry pick the classicals and screech “comparative and absolute advantage” as all the tax proceeds and the jobs swim offshore. At the same time there will be no accounting for the enforcement of IP on a worldwide scale. The beneficiaries of the world policeman refuse to pay the cost of a military that is 5 times the size of the next most imperialistic nation. “Comparative advantage” is a macro deal and it harms producers supposedly for the benefit of consumers. What gets lost in this cherry picking ideal is the fact that would be consumers must have income or they cannot benefit.

    So take yer pick: Proper tariffs or an extremely progressive tax system. And in either case a much broader welfare system of single payer national health insurance and a much improved pension system.

  3. The real question is, (in my opinion), has Obama already made too many “political” decisions to make one think his administration will be obviously better than the last but too similar to all the rest?

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