Wednesday, July 2, 2008

Obama Tax Plan

I was doing some number crunching tonight on how the Obama's tax plan would affect wealthy wage earners. I think this is an interesting analysis because some of the biggest donors to Obama's campaign and the Democratic party are wealth lawyers, doctors, and bankers.

The main changes in the plan with respect to income (ignoring capital gains for now) are
  1. Highest marginal tax rate increases from 35% to 39%,
  2. Social security taxes apply to anything over $250K.
A married lawyer in a single income household making $500/year would see his federal taxes (income tax + payroll taxes) increase $32K from $176K to $208. This represents an overall tax rate increase from 35.1% to 41.5%. If this person lives in New York City or California, they are likely to pay over 9% of their income to the state. This means they are getting very close to paying most of their income to the government. At $500K it's pretty close to half depending on deductions and exemptions. Anything much higher and it's squarely in the category of paying more than half to the government. A neurosurgeon in the same situation making $1,000,000/year is going to see his taxes increase by $90K putting him at paying close to 54% of his income to the government if he lives in California.

I wonder if there's a psychological effect when somebody realizes that 7 months of the year are spent working just to pay the government.

This includes only the direct effects of the taxes on high wage owners. It's not clear if the companies paying these earners will have to pay an additional 7.5% also on the wages over $250K. If so, these lawyers and doctors may see their wages decreased or more likely for the costs to be passed on to the customers.

I wonder if Obama will really be able to pass this tax plan. He will be taking a lot of money away from his largest contributors. Then again, maybe these contributors making it back on the flip side. Univeral healthcare would be a huge handout to the medical industry. Increasing the regulatory framework that is likely under a Democratically controlled Federal government will mean huge new business for lawyers. Tax laywers are likely to see a surge in their services as higher rates driver incent wealthy people to find more ways to protect their money from the government. And a big bailout of deliquent homeowners from an Obama plan would be an enormous gift to the banking industry. And could Obama really simplify the tax code by sending the majority of Americans a tax bill instead of requiring them to buy Turbo Tax or go to H&R Block? I learned recently that Intuit and other tax lawyers spend ridiculous amounts of money lobbying the Federal government to keep the tax code complex to maintain their businesses. Is Obama going to take away their customers?

If this plan does pass, I predict it will result in a bigger government spending more money on things we don't need. For example, Obama wants to increase the size of the military and add more subsidies for ethanol. The main outcome will be increased price inflation which will mostly affect the people Obama most wants to help. It will result in loss of jobs and economic growth. The fastest growing economies are outside the United States where taxes are much lower. We're already seeing a problem retaining talent in this country. University students from China and India studying here used to stay here and take jobs. We're now seeing them return to their countries after they get their degrees. I think this will become the norm.

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