Tax policy does matter.

If Obama wins, investors will take capital gains in 2008 before his higher capital gains rate takes effect. This will cause a surge of gains this year and a dramatic fall off in those revenues beginning in 2009. In a conversation among several wealthy investors some are already taking their gains fearing a sell off and lower prices when Obama’s victory is actually realized in a few months. Even the most politically liberal among them are strategizing the impact of a Democratic victory on their portfolio.

A higher tax on income in the near future such as an Obama increase of the cap on social security income, will cause charitable contributions to be delayed. Rather than give a thousand dollars this year and a thousand dollars next year, I may wait and give two thousand dollars next year and get the larger tax deduction. Or the higher income tax may simply leave me with less money to give to charity in any form.

The higher tax on income will cause earners to substitute benefits for income. Perhaps I can persuade my boss not to give me a $50 per week raise but to increase the company portion of my health insurance by the same amount. Perhaps instead of a thousand dollar bonus I will request my company donate a thousand dollars to cover a charitable obligation.

There are two points here. Taxes do affect behavior. Even the liberals will avoid taxes by any means possible. And the wealthier citizens will focus far more on tax avoidance than the less wealthy citizens. This means that tax cuts and tax increases on the wealthy have far greater impact and the result will not be more tax revenue.

These tax avoidance strategies are the simple and obvious ones. After the increase the accountants and tax attorneys will be busy advising their clients of more and better strategies. When the laws increasing taxes are written the lawmakers will be adding tax some breaks and removing other to satisfy their constituencies and themselves.

In fact tax legislation is the biggest cause of lobbyists in the first place.

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