A clear and concise — but brief — explanation of why Obama’s new tax hikes are a bad idea

 James Pethokoukis

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AEI’s Alan Viard:

However, even as the President’s plan eases tax barriers to work, it introduces major obstacles to saving. The plan starts on the right track, with measures to make it easier for people to save at their workplaces. But it turns around and strikes a heavy blow against saving by taxing some capital gains at death and raising the top tax rate on capital gains and dividends.

Those proposals would amplify the income tax’s central flaw, its penalty on saving. People who earn wages and spend them immediately pay tax only on their wages. But those who earn wages, save and consume the proceeds in the future pay tax on both their wages and the returns on their saving. It doesn’t make sense to put heavier tax burdens on people who choose to save for the future rather than spend today, particularly when their savings finance the investments that drive the economy’s long-run growth.

Taxing capital gains at death could be a step forward if tax rates on capital gains and dividends were cut by enough to prevent an increase in the overall burden on saving. For that matter, the combination of taxing gains at death and raising the rates could be a step forward if it was offset by scaling back the corporate income tax, a particularly complicated and destructive levy on saving and investment.

But that’s a far cry from what the President is proposing. His plan would leave the corporate income tax in place while taxing capital gains at death and increasing the top tax rate on gains and dividends by more than 4 percentage points (on top of an increase of almost 9 percentage points in 2013). Taxing the savings of “the 1%” to finance tax cuts for the middle class may be good politics, but it’s a shortsighted approach that could undermine long-run economic growth. A better approach would have been to curtail the growth of entitlement benefits for those well above poverty and to limit tax breaks for expensive owner-occupied homes.

By the way, Viard also has coauthored a sweepingreform plan, which would “eliminate the corporate income tax and would instead tax American shareholders of publicly traded companies at ordinary income rates on their capital gains and dividends, with capital gains taxed, and capital losses deducted, as they accrue.” And I offer my two cents on the Obama plan over at The Week