March 11 (Bloomberg) -- If letting top income-tax rates go back to where they were in 2000 is class warfare against the rich, I’m ready to snap to attention with my old M1 rifle on my shoulder.

What a ridiculous label, class warfare. It’s hardly aggression against any class to have a progressive income-tax system in which fairness and ability to pay are important considerations in setting rates for different income groups.

As far as the top tax rates are concerned, what President Barack Obama has proposed in his comprehensive, tightly crafted budget is to leave current law unchanged. That’s right: The law already calls for today’s 33 percent rate to go to 36 percent and the 35 percent rate to rise to 39.6 percent, in 2011.

Why did a Republican Congress and President George W. Bush countenance the 2011 expiration dates in the 2001 tax-cut bill? It was one of several deceitful provisions that made rate reductions temporary to hold down estimates of revenue loss. Of course, the GOP intended all along to make the rate cuts permanent.

Obama would let the Bush rate cuts expire only for couples with incomes above $250,000 (above $200,000 for single individuals) and raise the rates for them on capital gains and dividends to 20 percent from 15 percent.

Unfair? I don’t think so, given these earners’ relatively greater ability to bear the added burden. There’s no doubt that a larger share of the nation’s income has become concentrated at the very top of the distribution.

Needed Revenue

The extra revenue would be used to help finance the government’s necessary role in dealing with the dangers of climate change and improving access to health care and control of its costs. And in a fortunate bit of timing, the resumption of higher taxes wouldn’t begin until 2011, when the economy is likely to be on the mend.

The Obama plan would give most taxpayers small reductions in tax liabilities, partly to stimulate the economy and partly to offset the increase in energy costs they will encounter following implementation of a new cap-and-trade emissions-control program. A direct tax on carbon emissions probably would be more efficient. Unfortunately, it’s a non-starter politically.

There’s a rare coherence to the Obama budget in that it simultaneously tackles many of the serious short-term problems the country faces, such as the need to stimulate the recession- wracked economy, and longer-term ones such as climate change.

Furthermore, it does what no budget proposed by Bush or Bill Clinton ever did: it treats the alternative minimum tax realistically. That is, it acknowledges that lawmakers would act every year to prevent the AMT from hitting millions of added taxpayers.

Real AMT Fix

This year’s fix has already been made. Instead of counting phantom revenue for the future, Obama wants to index the AMT brackets for inflation, a change that’s been needed for years. This would reduce expected revenue by $576 billion over the next 10 years, according to the budget.

The budget’s very coherence introduces an element of risk. Obama has to persuade Congress to deal with it as a package rather than cherry-pick the easy parts -- the middle-income tax cuts -- while rejecting the hard ones, such as a realistic emissions-control program.

It’s going to be a hard sell, and some key congressional Democrats are opposing parts of it, including limits on farm subsidies.

Some also are skeptical about a proposed limit of 28 cents per dollar on the value of itemized deductions by higher-income households, including those for mortgage interest and charitable gifts. They shouldn’t be.

Mortgage Deduction

The value of the mortgage-interest deduction goes overwhelmingly to taxpayers in upper brackets. Sooner or later it ought to be capped or eliminated, and this could be a step in that direction. Sure, the housing market remains in dreadful shape, though keep in mind the change wouldn’t take effect until 2011.

As for charitable gifts, when the top tax rate fell to 28 percent in the late 1980s, giving fell but hardly collapsed.

At least there’s room for disagreement on those issues. There’s no rational argument against Obama’s plan to treat so- called carried interest as ordinary income rather than a capital gain.

Carried interest is a managing partner’s share of gains when investments of private-equity or other funds are sold. That share, usually 20 percent, is just a management fee, not a gain on capital at risk, and should be taxed accordingly.

Unfounded Fears

When Clinton proposed raising the top rates to 36 percent and 39.6 percent in 1993, there were plenty of predictions that the higher marginal rates would hurt Americans’ willingness to work and invest. Some economists argued that so many people would opt for leisure instead of work that the higher rates would raise no additional revenue.

Instead, a boom ensued in the latter 1990s, and the Congressional Budget Office credited the higher rates with generating a great deal of revenue.

What did Bush’s lower rates produce? Mediocre growth, very large deficits and financial-market manipulation.

The reality is that tax rates aren’t nearly as powerful a force as some people think they are.

Nor is the degree of progressivity a moral issue, as some conservatives seem to think. Going back to the rates in effect just several years ago is hardly an act of immorality, or a declaration of war.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: March 11, 2009 00:01 EDT