A Taxing Problem

Is the tax code too progressive?

A lot of folks talk about marginal tax rates on the rich. After the Bush tax cuts expire, with the surcharges for health-care and the phase-out of deductions, a lot of upper-income folks will be facing marginal tax rates of as high as 70% in some states. That means that the government is subsidizing leisure: time off without pay costs them a lot more than it costs you.

But progressivity is a problem for the other end of the income stream as well. When you factor in subsidies for housing, education, and heath care, a lot of folks are just as well off making 20 thousand a year as 40 thousand. That’s because the support phases out as your income grows.

This is important, because incentives matter. If people don’t see much of the fruits of their work, they’re less likely to work longer, harder, and smarter. And it’s the long, hard, smart workers that enrich all of us. It’s in all of our interest to encourage all of us to put our skills to work. If taxes get too progressive, that just doesn’t happen.

Douglas R. Tengdin, CFA
Chief Investment Officer
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