Why Ideologues Should Not Set Income Tax Policy

Setting objectively defensible tax policy is very difficult when non-economic considerations are part of the game. The reason for this is that on many occasions, taxation policy tries to achieve diametrically opposed outcomes. For instance, many people think of income taxation as not only the quest to maximize public revenues, but also for equalization of incomes. On this issue of taxation, Barack Obama did make the campaign promise to raise the income taxes of the top 5% of income earners in the US. Predictably, the political responses were the same simplistic views of hitting the rich on one side and the counter-arguments about the need to pay for public expenditures. With the economic crisis in the US today, tax policy is right in the front of debates between the major parties. This is disappointing only because the same arguments are being given especially for those opposed to the intent to increase income taxes.

David Leonhardt traces the history of income taxation policies in the Us and more particularly about the need to consider tax brackets and the incidence of the taxes. As he states, the marginal tax rates in the US have reduced substantially in the period since the last century from a high of 90% to less than 40%. But most impressive in the article is the fact that the top tax rates today kick in at a very low income level when adjusted for inflation and that at one time, the tax brackets were sufficiently broad that the marginal rate applied merely to John D. Rockefeller, an individual with a very high income.

One sees that this illustrates the fact that setting income tax policy requires trade offs related to maximization of revenues on the one hand and the ability to number of tax brackets to ensure progressivity. As matters stand, many people who are merely wealthy are subjected to the same tax rates that apply to the wealthiest people in the US. That is very difficult to justify. Consideration of the tax brackets is due as well because income tax policy is not supposed to be easy. Wat makes it confusing is that many ideologues come in with answers before the problem is even stated. The US government today needs to improve revenues and that means that raising the top tax rate is inevitable. Still, it should consider the tax fact that the marginal tax bracket kicks in at a comparatively lower level in real terms.