Obama's plan to 'tax the rich': About time, or a big mistake?

The spending is staggering: $700 billion to rescue the banks, plus $787 billion to stimulate the economy. A $3.6 trillion US budget. Even as some Americans scramble to file tax returns before Wednesday's deadline, questions of who, exactly, is going to pay for all this seem to boil down to a simple answer: Tax the rich.

Some call it wealth redistribution or socialism; others call it cultural warfare. In any case, requiring the well-heeled to pay more is the most talked-about strategy for obtaining new revenue. But how much good will it do? And might it even do harm?

Of course, boosting taxes for the top two income brackets – as President Obama proposes – wouldn't happen until 2011 at the earliest, assuming Congress goes along. That move, plus other tax changes that primarily hit the wealthy, would bring in about $637 billion over 10 years – revenue intended to help curb a rampaging federal deficit.

Whether taxing the rich will do much to reduce the budgetary red ink – and whether it will act as a drag on job creation – are the battle lines along which the coming fight will be waged. Alas, history is an unreliable guide to the outcome. Perhaps all that can be said for sure is that "taxing the rich" will make a lot of struggling Americans feel better, but how it will affect the economy is mostly a mystery.

"The higher tax rates could potentially cause high-income workers – including small-business owners – to work less, to retire early, to switch jobs.... There are a lot of potential effects – and one is that they could act exactly the same," says Benjamin Harris, a senior research associate and tax specialist at the Brookings Institution in Washington, D.C., in an e-mail.

Jeff Swann, a denizen of the top tax bracket, does not expect to change the way he does business if the tax hike materializes. The co-owner of Point of Sale System Services in Shirley, Mass., says giving more money to the US government might even fulfill some small bit of patriotic duty.

"I'm a regular businessman with a small business, and I want to make as much money as possible," says Mr. Swann. "But if what I'm making puts me in the top 10 percent of American life, life is pretty good.... I don't need to run around and buy 10,000 shoes."

"Tax the rich" refers mainly to Mr. Obama's plan to raise the income-tax rate for joint filers earning more than $250,000 a year (or more than $200,000 for individuals). That would affect between 2.5 million and 3.2 million Americans – about 2 percent of the population – and come after more than a decade of increased concentration of wealth in the hands of the uppermost sliver of US society.

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