Barack Obama and John McCain’s tax plans couldn’t be more different. Obama wants to significantly raise taxes on the wealthy, while lowering them for everyone else, and keeping the overall tax revenue about the same. McCain’s idea is for essentially no tax breaks for anyone making under $66,000 a year, and massive cuts for the wealthy and a huge drop it federal tax revenue. Not even considering the judgement in cutting taxes and fighting a war at the same time, what else is wrong McCain’s (or, most likely, his advisors’) thinking? Why should the rich be taxed “more” then the poor? Shouldn’t we all be taxed the same percentage?

The thinking is that, in America, we reward people for being successful, we don’t tax them for it. But that’s coming at the question from the wrong end. Taxation needs to be thought of as a hardship necessarily imposed on the people by its government. That hardship is what needs to be equal, and it’s not measured be percentage of gross income. Think for example, if we had a neutral tax system, neither progressive or regressive, at 25% for all income levels. That’s actually much better than the regressive system we have now, but let’s just use it because the numbers are easy to talk about. That means that the school teacher making $30,000 a year will have his or her income reduced to $22,500 and John McCain would see his income reduced from $3,900,000 to $2,925,000. Of those two situations, who do you think is going to have to modify their lifestyle more because of taxation? Maybe it would be so hard on McCain that he would have to sell one of his houses, but he can’t even keep track of how many he has. I doubt he would even notice. The fancy, economic way to say this is that the utility gained from additional income exhibits diminishing marginal returns, so for taxation to increase linearly with utility, it must increase non-linearly with income.

So then, what percentages actually match up with hardship (utility)? I’d say somewhere around two percent for the school teacher and 30 to 40 percent for the multi-millionaire. Maybe even more extreme than that. But that will never happen, and that’s okay. It’s probably good to reward the successful by taxing them less. But taxing them less utility could still be a very progressive tax. Certainly the school teacher will still be taxed “more” than McCain by Obama’s plan, even if the percentages go up as your income does.