Obama, Democrats Embrace Fog of Complex Tax Plans

June 11 (Bloomberg) — Welcome to the new era of tax intelligence. If a tax idea doesn't sound as if it were written in a seminar at Swarthmore College, it is stupid. The more complex, the better.

Democrats are adroit at developing such proposals. The party appears to favor plans that serve at least two seemingly unrelated ends: We should punish oil companies while soothing middle-class mothers (windfall-profits-tax revenue plan). And we should curtail carbon emissions while paying tribute to the glories of the free market (cap-and-trade legislation).

These days, no Democratic proposal is complete without a lot of obscure abstract nouns. Typical is the work of Jason Furman, presidential candidate Barack Obama's new top economic adviser. At the Brookings Institution, Furman wrote of an "income-related refundable tax credit" for health insurance that functions via a "sliding scale" and at the same time prevents "job locks."

Anyone who wants to disagree with that first has to translate it from the German.

Republicans are also big on complexity and brains. My friend David Frum, a former speechwriter for President George W. Bush, calls for a "smarter" tax code in his new book, "Comeback." John McCain, the presumptive Republican candidate, supports cap and trade.

You can argue that Washington's new affection for complexity is a good sign. Give two parties license to be complex, and they may emerge from the fog with a decent bipartisan compromise. That's what happened in 1986, when Democrats joined Ronald Reagan in passing the act that brought the top income-tax rate down to 28 percent.

Hiding Bad News?

But you get the sense that all the talk this time is serving to obscure the possibility of unusually bad news.

Start with the individual taxpayer. Democrats want to let the old Bush tax cuts expire, which would take the top rate on the income tax up 4.6 percentage points.

Obama for his part has repeatedly and specifically spoken of lifting the cap — there's that word again — on the payroll tax. This move alone amounts to a 6.2 percent increase on higher earners — 12.4 if you count the employers' side, which economists do.

These two increases alone would undo all the Bush tax cuts. Add in some other unlovely obscurities and you have a top tax rate of close to 50 percent on the entrepreneur. That is far higher than even the 43 percent top rate that obtained in the later Clinton years.

No Ordinary Income

On dividends and capital gains, Democratic plans are equally distressing.

Obama wants to raise the capital gains tax to 28 percent. House Speaker Nancy Pelosi would certainly live with that, but so would some Republicans, since 28 percent is the rate in the 1986 law they supported.

Democrats want to start treating dividends like ordinary income again, which means taxing them at something like 40 percent if you allow the expiry of those oh-so-yesterday Bush income-tax cuts. McCain wants to slash capital-gains taxes, though you don't exactly see Democrats picking up on it.

The trouble continues in the health-care area. There's a distractingly market-friendly aspect to the Furman plan on health insurance.

Furman is correct — the millions of uninsured Americans in the working class do need insurance. His credits plan is based on a second accurate assumption — one first made famous, in fact, by Newt Gingrich. The tax break for employers on employee health insurance distorts the entire tax system. But to remove that break for employers while curtailing the new tax credits' availability to higher earners amounts to an enormous marginal tax increase that comes on top of the aforementioned ones.

Blow to Competitiveness

There's more. With a Democratic Congress and a Democratic president, Pelosi is likely to get a windfall-profits tax on energy, especially now that Obama has explicitly endorsed such a levy.

An Obama economic adviser walked through the thinking on windfall profits on Fox News: "The point that Senator Obama has made is that we need to relieve the middle-class squeeze, the burden on the middle class with higher food and energy prices, and we also need to make sure that these enormous profits are being channeled into alternative investments in energy.'

Taken together, all these likely tax increases would deal a blow to American competitiveness like nothing seen in the postwar era. Yes, the country did just fine back in the 1950s, when the top marginal rate on the income tax never moved below 80 percent. But in the 1950s, Europe was in rubble, and Mao Zedong was personally navigating China toward economic disaster.

Continuity Counts

Sustaining certain aspects of the current horrible system may be good. One of McCain's best moves this year was to posit that the Bush tax cuts were worth renewing for the continuity alone. McCain didn't say that sustaining the current rates would yield a boom. He merely recognized that sometimes certainty is more important than stimuli.

The overall point isn't that Obama has or even wants the worst economic programs. As noted here, there are intriguingly entrepreneur-friendly components to a lot of the ideas coming out of his campaign. It's that complexity for its own sake is no substitute for virtue. A preoccupation with the political ideal of change can bring about the sort of change not even the senator himself wants.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.

© Copyright 2008 Bloomberg

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