Nov 06 2008
Obama, the “re-distributor in chief” - Understanding the difference between progressive, proportional and regressive taxes
Published by Jason Welker at 5:22 am under
Technorati
Flickr
del.icio.us
Ice Rocket
WikipediaBarack Obama and Joe Biden: The Change We Need | Taxes
The following was published in the Chicago Tribune’s “Voice of the People” page on October, 29:
Redistributing wealth
On my way to lunch recently, I passed a homeless guy with a sign that read “Vote Obama; I need the money.” I laughed. In a restaurant my server had on an “Obama 08″ tie. Again I laughed. Just imagine the coincidence. When the bill came, I decided not to tip the server and explained to him that I was exploring the Barack-Obama-redistribution-of-wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need—the homeless guy outside. The server angrily stormed from my sight. I went outside, gave the homeless guy $10 and told him to thank the server inside as I’ve decided he could use the money more. The homeless guy was grateful. At the end of my rather unscientific redistribution experiment, I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn even though the actual recipient deserved money more. I guess redistribution of wealth is an easier thing to swallow in concept than in practical application.—A. Hart, Forest Park
The comment reflects a general contempt for the concept of taxation, specifically taxation that “redistributes wealth” from those who earn higher incomes to those who earn lower incomes. Essentially, the views expressed in this letter are identical to the attacks hurled at now President-elect Barack Obama by the McCain/Palin campaign during the last few weeks of the presidential race.
Accusing him of advocating a “socialist” system that would raise taxes on America’s hard working folks and redistribute this wealth to, apparently, the not-so-hard working folks (such as the bum in the letter above), McCain begain telling his supporters that Obama was running not to become America’s “commander-in-chief”, rather its “redistributor-in-chief”.
Clearly, the McCain/Palin message struck home for some Americans, as the author of the letter quoted here seems to believe that an Obama administration would, in fact, raise taxes for working Americans earning as little as a waiter or waitress.
Below is an excerpt from the Obama’s website, in which he explains precisely how he intends to change the way Americans pay taxes:
Under the Obama Plan:
- Middle class families will see their taxes cut – and no family making less than $250,000 will see their taxes increase. The typical middle class family will receive well over $1,000 in tax relief under the Obama plan, and will pay tax rates that are 20% lower than they faced under President Reagan. According to the Tax Policy Center, the Obama plan provides three times as much tax relief for middle class families as the McCain plan.
- Families making more than $250,000 will pay either the same or lower tax rates than they paid in the 1990s. Obama will ask the wealthiest 2% of families to give back a portion of the tax cuts they have received over the past eight years to ensure we are restoring fairness and returning to fiscal responsibility. But no family will pay higher tax rates than they would have paid in the 1990s. In fact, dividend rates would be 39 percent lower than what President Bush proposed in his 2001 tax cut.
Americans can be funny sometimes. McCain’s strategy of painting Obama as a socialist and attacking his tax plan clearly convinced some people that Obama was the wrong man to support in a time of recession. Taxes are not fun for anyone to pay. I would love to keep 100% of my earned income, who wouldn’t? But clearly, taxes serve a purpose. It just surprises me that so few Americans seem to understand the connection between the taxes they pay and the public goods enjoy for “free”. Obama the “re-distributor of wealth” clearly infuriated many Americans, including Joe the Plumber:
Joe the Plumber: Wealth Redistribution ‘Infuriates Me”
Discussion Questions:
- Are taxes necessary? Why? What are some of the “public goods” tax revenues are used to provide in America and your country?
- Joe the Plumber proposed in many interviews doing away with America’s progressive income tax system and replacing it with a flat tax. What is the difference between progressive and flat income taxes, and which system would place a larger burden of tax on the poor?
- Another idea for dealing with the tax system is to do away with the income tax altogether and replace it with a nation wide sales tax (of between 25% and 30%), called a “Fair Tax” by proponents in the United States. On whom does the largest burden of a sales tax fall? Is a sales tax “fair”? Why or why not?
- Does the letter written to the Chicago Tribune accurately reflect the Obama plan for modifying the income tax structure in the United States? Why or why not?
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
![Freakonomics [Revised and Expanded]: A Rogue Economist Explores the Hidden Side of Everything](http://ecx.images-amazon.com/images/I/51Z1scnqz1L._SL160_.jpg "Freakonomics [Revised and Expanded]: A Rogue Economist Explores the Hidden Side of Everything")
![The World Is Flat [Updated and Expanded]: A Brief History of the Twenty-first Century](http://ecx.images-amazon.com/images/I/410FGAGYGPL._SL160_.jpg "The World Is Flat [Updated and Expanded]: A Brief History of the Twenty-first Century by Thomas L. Friedman")
But does government really need to provide so many goods for free? Maybe thats why they are not noticed - because no-one wants/uses most of them. Also, they are not always for the benefit of everyone, like the “bridge to nowhere” for example. How about lowering federal taxes and increasing state taxes, moving pork spending to state budgets and therefore making the pork projects more accountable to local government, and local constituents? Otherwise there is a perverse set of risk rewards: only local constituents can vote in and out their representatives for federal gov. Why would they ever want to vote out their representative who brings the pork home paid for by a bank account funded by the rest of the country?
Personally, I feel that both sides of this argument have valid points. After reading this article I have come to the decision that wealthier individuals should pay higher taxes than those less fortunate. while there are some people who suddenly find themselves in serious debt or poverty because they have simply not put in the time or effort to change this, it is my overall belief that the majority of poor citizens suffer from the unfortunate truth that life is not fair and that opportunities and beginnings in life are obviously not equal. To say that a man sat in an office all day works harder than a poor merchant seller on the street is absurd. Having lived in Brazil I have had an up-close view of the poorer classes. This experience opened my eyes and showed me that some of the hardest working people in our world, the people who do the jobs that keep our societies running, earn close to nothing in wages. At first I thought that everyone should pay an equal percentage of taxes based on one’s income. After thinking it through I have concluded that that is not entirely fair. People who earn more money, the wealthier classes, have a greater possibility of saving money in a bank. Those who are poorer live from check to check where every penny counts and taxes place burdens on the poor that are often times too difficult to deal with. If the rich choose to live in moderation, as oppose to wasting all their money on an unnecessary amount of luxury goods, an increase in taxes will do little to alter their day to day lives. These taxes could then be used to help those in need, those who work hard but cannot break out of the “poverty cycle.”
I think you make a good point about how the McCain group mis-characterized Obama’s tax plan as socialism, but I think Obama’s proposed tax cuts is a mis-representation itself. The story attached to the following link shows how marginal tax rates will actually go up for most people under the Obama tax plan.
http://www.american.com/archive/2008/august-08-08/the-folly-of-obama2019s-tax-plan
I also think it is important for people to realize that the so-called upper class of society already pays a huge portion of the taxes. So to say they need to pay their fair share is wrong, they already are and have been for some time. The following link shows how they are currently paying and how many people aren’t paying taxes.
http://www.heartland.org/policybot/results.html?artId=23876
I’m not for one plan or the other. I just want people to see the truth behind what is being said publicly.
I personally think taxes are necessary in life, to make sure that wealth distribution of wealth is fair. During George W. Bush there was small upper class of about 10%, which possesed 70% of the wealth of the US and there was the lower class, which faught for the remaining 30% of wealth in the country. So Taxing the really rhich people won’t hurt really anybody, because the rhich will still be rhich after. About the fact that McCain has critsized Obama about his plans, calling him a socialist, I can only laught about. He critisizes that Obama is aiding more the people, who live on the streets and haevn’t even searched for work, while stealing from the hardworking people. Well, why are people living on the streets? They could have had a job, lost it and did not find another one, or their education wasn’t good enough. McCain also forgot to see that there are workers, who work just as hard, as for example a banker does, but get much less income and therefor have to go begging. I have lived in Talinn, Estonia and Sao Paulo, Brazil, where many people are poor and I can say that everyone works so hard it’s just unbelievable.
Taxes can also be put on products, like ciggarets, weapons, drugs, whatever hurts the human being. So I personally think that what Obama is doing is correct.
Justus I agree with your points above however you say: “Taxing the really rich* people won’t hurt really anybody, because the rich will still be rich after.” Do you believe then that they should pay a higher percentage tax on income, as well as increasing the tax on luxury goods as it is mostly likely the super rich that are currently fueling the luxury goods market, even more so now with the economics slump, as middle class consumers are not able or willing to purchase a loan to acquire them. It will be interesting to see the effects of Obama’s Tax policy, when he comes into office.
I believe that cutting the taxes for the middle class is exactly what needs to be done right now in the current situation of the economy. Justus said that 10% of the population own 70% of the wealth, first of all it is not fair, because I am certain that at least one of the other 90% is working hard too and also those 10% are probably not spending it all. The middle class is the largest part of the population so they are the only ones who can most effectively do something against the current crisis. By lowering the taxes it encourages the middle class to spend more and lets the economy grow.
Martin and Justus, your rhetoric only enforces the notion that taxes are for punishing rich people. Once this tax is taken, how does it ever get back to the middle class in a form where they actually notice a difference? Further, some really smart people analyzed Obama’s actual plan and found that it would be adding taxes to the lower classes, not granting them a break. Check it out:
http://www.american.com/archive/2008/august-08-08/the-folly-of-obama2019s-tax-plan
Second,
Capitalism has never been about rewarding people who work hard. Also, what is the definition of hard work? Sweat? Time? People on Wall Street may rarely break a sweat, but they are at their desks from 6am to 3 am sometimes, is that not hard work? When do factory workers in Detroit ever put in hours like that? (The union would never allow it! This while GM and Ford have to pay them a pension for the rest of their lives retirement, which is a growing burden as life expectancy expands)
Capitalism is about rewarding those who create goods and services that are valued alot by many people. I could work really hard cleaning toilets my whole life, but at best I can only clean 100 toilets in a day, and few people in the world would ever sit on my toilets. But if I work really hard to invent a self cleaning toilet and sell the technology to those who want a clean toilet, I can sell clean toilets to more than 100 toilet users in a day. And I will be paid more.
To do so, I would have to spend the time researching the self-cleaning toilet and putting my own time and money into developing the product - putting my own well being at risk. What if no one buys my product? Its a scary proposition and maybe I would prefer the certainty of cleaning my 100 toilets by hand. What keeps me in the game? It is the prospect of an outcome where my idea would pay me more than washing toilets by hand, despite the risk of failure. When my upper bound is taxed away, it is a scarier proposition to put my well being at risk and thus I am less likely to innovate and provide a better product than hand washed toilets. And that is the problem with taxing high income earners. The death tax is already a way in which large sums of money from rich families gets redistributed anyways. So let the people who made your life better be rewarded for their successes while they are alive. Then tax the hell out of them after they die.
Overall I think taxes are necessary to have an economy run. Taxes are used by the government to help the people being taxed. For example, the government uses the taxes to build roads for you to drive on. That is just one of many examples. The progressive income tax posses a higher tax on people who make more money making rich people pay more than poor people. A flat tax on income means that everyone pays the same percentage of their income which I believe is unfair because people who are not making as much need the money more then the CEO’s making tons and tons of money a day. I think that the sales tax idea has promise. It is an indirect tax to the rich people because they tax luxury goods and the only people who can afford luxury goods are the rich.
I agree with Dan, taxes are a necessary for a country to run efficiently and to run at all. In order for a government to gain revenue they must tax the people, after all the taxes imposed are there to benefit the people. More specifically income taxes are there to help the people. That revenue is there to pay for health care and other such things. However I agree with Joe the Plumber where he believes that there should not be such a high income tax but should be taxed on flat rate where everyone would pay the same tax and would not be taxed as heavily because they have worked hard. I believe that those who have worked hard and tried to earn their money should be allowed to keep it. I don’t agree with the idea of a tax on luxury goods as they are an inelastic good and should price increase because of the tax demand will decrease therefore decreasing revenue.
Taxes are indeed necessary since they are part of a cycle that affects both consumers and producers. Even though it may seem like a waste of money and an unnecessary cause to pay the government, in return, the government collects our tax payments and uses it to build roads, hospitals, educational systems, etc. Therefore, our tax payments are actually there to provide help for us. Moreover, I personally think that taxes should be slightly lowered, as Martin said, so that consumers and producers feel more comfortable in that area, however this should not mean that only the rich should pay higher taxes; a certain percentage of each person’s income might not be the same, but who is to distinguish between who is poor and who is rich? Giving a fixed percentage value on taxes might seem like it is affecting the poor more, however the rich also have to pay a larger amount of their income to full fill these taxes.
i find it a step in the right direction. The whole idea of americanism in the first place was to allow every man an equal standing from which to build his wealth in a free system. This tax system is for the people who actually believe in the hope for a fair society. It might give disincentive to the self-interested people in the society, but that is the cost. The problem is, that i doubt it will help the ailing economy. This is more of an idealistic plan for better times. Giving money to people who need it only means that less people will have surplus cash with which to buy luxury goods. A whole country with people buying only necessities might lead to the collapse of many companies like apple or maybelline. This would be especially disastrous for america. Thnx for trying Obama, but not right now.
We can tell that he hasn’t a clue why we have tax’s in the first place. They are needed for all kinds of areas, such as the military, schools, fire and police services ect. Without tax the country would fall into caos and their would be no laws as no goverment could exist. We would go back to a primitive society with no order.
Joe wants a flat tax, which is a tax everyone needs to pay no matter what level of income. It doesnt warry depending on the amount a person earns. He wants flat tax to replace progressive tax which is where the more you earn, the higher percentage of your income you pay in tax. The benefit of progressive tax is that it takes a burden off the poor, as they dont have to pay as much giving them more money to spend and live.
As Dan said, taxes are necessary for any economy to function properly. With the American economy in the state it is right now, the progressive taxes, taxes that take a larger percentage from the income of high-income people than they do from low-income people, which Obama has proposed are the best option. While it is understandable for people who make more money to argue against this claiming that they deserve more money because they have worked harder, this will not always benefit the economy. For example, when very wealthy people have higher real incomes and will spend more. However, they are more likely to buy luxury goods, which are commonly imported goods. This will further worsen the United States already $10.6 trillion budget deficit sending the nation further into debt. If it is poorer people, however, that receive the tax break, they will most likely spend their money on cheaper, domestically made goods from Wal-Mart, or a shop of that sort.
Jenny- do you honestly believe that the goods sold at places like walmart are made in America?Second of all, the economy is in a state where lending has dried up. This is because people who need to borrow are becoming more and more unable to pay back their loans. Surely we should be focusing on creating conditions that encourage these people/institutions with excess funds to be more willing to open their wallets and lend rather than taxing their extra dollars. That only makes them more likely to horde what they have left. Our economy is blowing up not because some rich people are either not spending anymore or buying luxury goods from other countries, its because the government induced conditions that caused excess lending to people who have no business receiving the kinds of loans they got. Now the markets have realized that money is never coming back, and companies (and a lot of formerly rich people) have to move on hoping that the loans will get paid back or that they can sell them to some other suckers without losing too much. Putting money in the hands of “poor” people is not a way to boost an economy. People of all affluencies need to feel safe spend as much as they were before. However I think we are witnesses to a paradigm shift where we are unlikely to see the U.S. returning to the spending levels we used to be at both because people want to have a bigger savings safety net and there will probably be fewer lenders out their to fund the most recent version of the American Dream, namely, “borrow and buy now, make our kids pay back later”.
To the rest of you about taxes, obviously there are public goods that need to be provided by a government. But my point was that we don’t tax in order to create equality. We should also structure taxes so that they do not create incentives that destroy economic and technological advances. To the degree that we tax as a punishment, it should be on things which cause unfair costs on society - e.g. smoking/drug use, polluting, DUI etc.