A Stitch in Haste

The big news in President Obama’s proposed $3.5 trillion budget (apart from it’s sheer size and the $1.75 trillion deficit that would flow from it) is a new proposal to phase out the deductibility of employer-sponsored health benefits for higher-income employees:

The officials said the resulting increase in revenues, estimated at $318 billion over 10 years, would account for about half of a $634 billion “reserve fund” that Mr. Obama will set aside in his budget to address changes in the health care system. The other half would come from proposed cost savings in Medicare, Medicaid and other health programs.

Side Question: When’s the last time a government successfully maintained (i.e., did not promptly raid) a “reserve fund”? Do we really need to cite the fictional Social
Security “trust fund” yet again? Or all those “rainy day funds” that state and local governments never established and therefore can’t draw from now that it’s, um, “raining”?

But there’s actually something much more pernicious in the administration’s tax package:

Administration officials said Mr. Obama would propose to reduce the value of itemized tax deductions for everyone in the top income tax bracket, 35 percent, and many of those in the 33 percent bracket — roughly speaking, starting at $250,000 in annual income for a married couple.

Under existing law, the tax benefit of itemizing deductions rises with a taxpayer’s marginal tax bracket (the bracket that applies to the last dollar of income). For example, $10,000 in itemized deductions reduces tax liability by $3,500 for someone in the 35 percent bracket.

Mr. Obama would allow a saving of only $2,800 — as if the person were in the 28 percent bracket.

The White House says it is unfair for high-income people to get a bigger tax break than middle-income people for claiming the same deductions or making the same charitable contributions.

Consider that proposition for a moment.

Take a hypothetical: Taxpayer 1 has in the past earned exactly twice as much as Taxpayer 2. But this year, Taxpayer 1 and Taxpayer 2 each earn an additional $100, and each donates $20 of that increase to a qualified charity.

The White House’s position is that it is perfectly permissible (indeed a moral imperative) to impose a higher marginal tax rate on Taxpayer 1 than on Taxpayer 2 on the way up, but that “it is unfair” to backpedal that unequal treatment on the way down (i.e., by applying the higher marginal tax rate to the charitable contribution). Even if Taxpayer 1 donated the entire extra $100 to a qualified charity, he would still have to pay a higher tax than had he not received the $100 in the first place. Anything else, the Obama Administration insists, would be “unfair.”

Call it the Ratchet Theory of Income Taxation: Tax policy must be crafted such that every single action a higher-income taxpayer undertakes must increase tax progressivity. No action by a taxpayer, no matter how economically (or “socially”) useful, even under the government’s own policies (e.g., encouraging charitable donations), can ever be allowed to result in decreased progressivity.

(Note: Not decreased revenue, but merely decreased progressivity. Because “income inequality” — no matter what underlying factors cause it, and even if it only means the poor get richer but not as much as the rich do — is increasingly the fundamental, and occasionally manic-obsessive, concern of the Fringe Left.)

It’s quite simple really: It’s one thing to punish success, which is what progressive taxation does. But if you take it too far and instead punish every action, even the “correct” actions, that the successful undertake, simply because they’re successful, then expect them to eventually stop acting altogether.

Previously:
–Does Progressive Taxation Really Help the Poor?
–Progressive Enough For You?