Tax policy: the biggest difference between McCain and Obama

Some people think Obama's a radical in disguise. I have my hopes, but I also have my doubts. I doubt he's going to pull us out of Iraq precipitously, or that he's going to change in any fundamental way the way intelligence operations take place, though I do believe he will do his best to avoid further needless foreign entanglements (about which I am less confident vis a vis McCain).

The one area where there is an unequivocal difference between a would-be President Obama versus a would-be President McCain is in their tax policies. The Wall Street Journal has a nice visual depicting how the tax burden would change for different earning sectors, if McCain and Obama were to implement their tax plans exactly as they have proposed them:

Frank summarizes the difference by noting that, "Under Mr. Obama’s plan, the income for the top 1% would decline by an average of 9%. The incomes of the top tenth of 1% would shrink by more than 10%. Under Mr. McCain, incomes for the top 1% would grow by 3%. The top tenth of 1% do best — with more than 4% growth in incomes."

Worth noting also in that column are the rabid claims in the comments section that tax policy should not be about promoting equality, but only about raising necessary revenues. That's all well and good ideological palaver, but the simple fact of the matter is that tax policy has always and everywhere been used for all manner of social purposes.

The deeper and more important question is whether the a democratic state has a compelling interest in trying to foster a relatively equal society. I think it does, and for this simple political reason: In a society in which money buys political power and access, as does ours, great disparities in wealth fundamentally undermine the basic democratic principle of that everyone if a political equal. Equality isn't just narrowly about everyone having one vote, it's more fundamentally about no one in the society having a disproportionate amount of political power.

Great inherited fortunes, in particular, are pernicious to democracy, as they entrench a born class of the politically powerful. This is why it's particularly important, from both a political process and a social justice perspective, that estate taxes be set at a very high level. While I buy the argument that there is some loss of economic productivity if you make the marginal income tax rate too high, especially on the wealthy, I've never seen an iota of credible evidence that economic productivity is hurt by high estate taxes. On the contrary, a high estate tax ensures that every generation is forced to succeed more or less on his or her own merits, and in that sense is likely to encourage aggregate economic productivity, rather than the reverse, since it will put a damper on the trustafarian scene.

In terms of balancing the desire for maximum economic productivity with a desire to avoid anti-democratic wealth disparities, therefore, the right solution is to keep income taxes as flat as possible, while applying a very high estate tax. My own view of the matter is that there should be a fairly high estate tax exemption--say, enough for the family to inherit one nice piece of property--and that thereafter the rate should be close to confiscatory. A simple proposal might be something like this: a $5m exemption, then a 50% rate on the next $10m, and a 90% rate on everything thereafter. If you're worth $15m when you die, your family will keep $10m of it. If you're worth $100m, your family will keep $18.5m. So it's not like anyone's going to the poorhouse. What's more, such a rate would greatly encourage charitable giving, which would also be a good thing.