Tax policy affects production. If you were taxed at 100%, you would not work and the government would get no tax revenues. If they taxed you 0% you would work and the government would still get no tax revenues.

The trick is to find that tax rate that raises the revenues the govenment needs, but does not kill your incentive to work and pay taxes.

Marginal taxes are the taxes you pay on the next dollar of revenue. It is the impact of taxes on the marginal tax rate that will affect prodution and the ability to generate the dollar tax revenue the government needs.

Obama clearly does not understand this or does not care. His tax plan repeats mantra like that 95% of the people will get a tax break, and 5% will get an increase. The first question is what is the amount of dollars generated by the tax on the wealthy and how much of a tax break will that provide per person for the lower income. I suspect that there is not enough rich taxpayers to fund much of a break to the poor.

Secondly, 40% of the people pay no tax, so how will he give them a tax break? Simple. He will expand several tax credits for the lower income that disappear as a single income approaches $75,000. But under his plan the credit will apply to a tax payer who pays no taxes, which means he will get a check from the government.

The last I heard of this it was called welfare. Obama has made a linguistic slight of hand that calls a welfare payment a tax cut.

He calls this plan “Making Work Pay” but it will do just the opposite. As a worker approaches the $75,000 mark he will lose about 40 cents of credits for every additional dollar of income. This is in addition to the 40 cents of total taxes he will will pay. This means his marginal tax rate at this point could be nearly 80%. This is enough to kill the extra effort to earn more. How in the hell is this making work pay?

I already see capital spending sharply declining because of the prospect of higher taxes on business, dividends and capital gains. The 5% he intends to raise taxes on are the very ones who will respond with lower capital spending.

Unfortunately the Obama supporters keep chanting “95% will get a tax cut” and the sound bites provide no real analysis or depth. I am only a little elitist when I say the vast majority of voters do not understand ‘marginal tax rates’ and how the are impacted by tax policy.

Raising taxes on dividends and capital gains and social security and on the top 5% is a disastrous move in this very fragile economy. His detailed explanation only makes it worse.