Obama Tax "Increase" Not So Bad

Economic View - Before the Tea Party, Thank Your Lucky Stars - NYTimes.com

Other protesters contended that the tax system already strains the vital connection between individual effort and reward and warned that further tax increases might destroy it.

But these accusations don’t withstand scrutiny. The current system is much fairer than many people believe, and the president’s proposal will make it both fairer and more efficient.

Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands? Money managers who bet clients’ retirement savings on subprime-mortgage-backed securities?)

Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events.

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The president’s proposal is modest: raising the top marginal tax rate from 35 percent to 39.5 percent, its level when Bill Clinton left office and well below the corresponding level in most other industrial countries. There has never been a shortage of talented people willing to work hard for success — even in countries with top rates much higher than 50 percent. And the president’s proposal would not cause such a shortage in 2010.

It would, however, promote more efficient provision of public services, in much the same way that contingent fee contracts often promote more efficient provision of services in the private sector. For example, when lawyers are willing to waive fees unless their client wins, wrongfully injured accident victims often gain legal representation they couldn’t otherwise afford. Similarly, when government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we’re lucky enough to end up among life’s biggest winners.