The Tax Man Cometh

Um, if you're not interested in tax policy, you just may want to move on to a different post. Go ahead, I won't mind. If you are interested in hearing my questions about Obama's tax plan, click "read more."



Ok, so for those of you still with me, here's the basic issue. Obama wants to increase taxes on the upper levels of the tax bracket. Fine.

However, I suspect that when Obama's tax plan goes into place, companies will merely increase the salary of management and executives so that their after-tax dollars are the same as before the tax revision took effect. In turn, this increase in salary would be paid for by increasing prices for consumers and/or cutting jobs. This would, in effect, set the tax burden firmly back on the shoulders of the middle and working classes. This is because the lower income earners would have to pay more or lose their jobs, thereby undermining the purpose of the tax plan - namely to shift a greater share of the burden to the upper levels of the tax bracket and alleviate financial strain on the lower brackets.

So here's my question: what safeguards are available to prevent that from happening? Surely there must be some combination of carrots and sticks available to prevent my hypothetical from happening. Otherwise, we're basically asking wealthy people to make a charitable donation - please pay more taxes out of your own pocket, and don't shift the cost to the lower classes. Please. Pretty please.

The only solution I can think of is indirectly tying the corporate tax system to the personal income tax system. Here's the idea: increase personal taxes on the upper tax bracket as planned. Simultaneously, increase corporate taxes, but offer a tax break for those companies that maintain upper bracket salaries at previous levels, adjusted for inflation. This tax break has to be big enough to make it fiscally viable enough to keep salaries as-is. By that I mean that the corporate tax break must be sufficiently large that foregoing the tax break and increasing upper bracket salaries would equate to an irresponsible waste of profits, which would hurt shareholder value.

Thus, by offering greater profits, we incentivize companies to freeze upper bracket salaries. In turn, this hopefully minimizes the transfer of the cost of increased taxes from upper brackets to lower brackets.

Doing the mathematic modeling on this is beyond my skill level. I don't know at what rate to set the upper bracket tax hike and the corresponding corporate tax increase/tax break. At the bottom line, the new rates must be sufficient to actually raise revenue. That is, the corporate tax breaks can't offset the revenue increase from upper level tax hikes. Similarly, some percentage of companies will probably raise salaries anyway, and that must be factored in. There also has to be a tightening of loopholes that would permit corporations and upper bracket earners to hide income in tax shelters.

There's also the problem of selling this idea. It is redistributionist, no two ways about that. I'm hoping that the idea of letting corporations increase profit margins would make it easier to swallow. However, letting corporations make more money is seldom popular with voters.

Finally, there's another consideration: state and local taxes. State and local governments are also suffering under budget strains, and need to increase revenue as well. If state and local governments hike sales tax, property tax, excise tax, and state income tax, then all the work done to keep money in the hands of middle class earners will be undone because they'd be paying more in state and local tax.

This is starting to make my head hurt, and I'm sure I've committed an egregious error somewhere in my modest proposal. If you have any thoughts, feel free to comment.

In closing, I don't know how Obama sleeps at night. In fact, I think he doesn't sleep. This morning CNN ran footage of him from 2006, and he looked great. Now, he's already grayer, his face more lined, and he hasn't even raised his right hand and taken office yet. I suppose it must be hard work when one takes seriously the job of carrying the weight of the world. The end.