"Now, I want to emphasize, this is not simply an issue of redistributing wealth. That's what you’ll hear from those who object to a tax plan that is fair. This is not just about fairness. This is also about growth. This is also about being able to make the investments we need to succeed. And it’s about we as a country being willing to pay for those investments and closing our deficits. That’s what this is about."
Barack Obama, Remarks on the Buffett Rule, April 11, 2012
Well, it isn't quite like making the oceans recede -- miraculous powers Barack Obama professed to have in 2008 -- but it is pretty close. The President wants us to believe that by raising taxes he can both grow the economy and slash the deficit. Whatever it was that Obama learned in Community Organizing 101, it apparently had nothing to do with basic economics.
The President has decided that rather than explain the dismal failure of his economic policies over the last 3-plus years, he'd rather play class warfare. So, he's been clanging the gong for what he calls the Buffett Rule -- a 30% minimum tax on all income for individuals that make a million dollars per year regardless of the source.
Imploring the same tactics as the Occupy Wall Street crowd, the President is pressing Congress to pass his Buffett rule. Smack around the few to appease the many. It's a strategy sure to make Saul Alinsky proud of his disciple – play high stakes class-warfare by demonizing a relatively small number of the wealthiest Americans, who he says are not paying their "fair share" in taxes which he self-righteously condemns as "deeply wrong and irresponsible."
Obama knows that the votes necessary to pass a tax hike – on the wealthy or anybody else – are nowhere to be found on Capitol Hill during these difficult economic times, and particularly during an election year. Obama Buffet Rule isn't about good government, economic growth, or balancing the budget. It's about re-election politics, and thus, reality and facts have very little to do with the President's rhetoric. This is purely about appealing to the uncivilized instincts of greed and selfishness in enough Americans to keep his job. A more honest President would call it what it is – Buffett Baloney.
Let's spend a moment on the facts, rather than the rhetoric. What Obama doesn't mention is that his Buffett Tax would barely make a drop of difference in the ocean of new debt he's creating. According to the Joint Committee on Taxation, the new tax would only generate an average of $4.7 billion of new revenue per year over the next decade. Since Obama's own budget projection calls for a $1.3 trillion deficit again this year, it would take 276 years just to cover the 2012 deficit, not to mention the $16 trillion already on the books and the trillions more to come.
Curiously, while Obama says the new tax would "help us close our deficit," he also wants to spend the same money on "the investments we need to succeed"…like more Solyndras. So, the same $4.7 billion will at once both be spent and saved. Obama has some experience in double counting the same dollars. He mastered the technique with the shell game accounting that he and Nancy Pelosi used to sell the obliging Democrats on ObamaCare.
The President blew right through $800 billion he said would stimulate our economy with only $5 trillion more national debt, economic stagnation, and persistent unemployment to show for it. Exactly how another $4.7 billion of government spending on green energy boondoggles and GSA debauchery is going to be the magic elixir "we need to succeed" is a mystery.
Obama and the federal government spend more in 11 hours than the Buffett Rule would generate in a year. Presidential grandstanding aside, the problem is not that Americans – wealthy ones or anybody else – are taxed too little; the government quite obviously spends far too much.
What level of taxation constitutes a "fair share" is forever going to be different things to different people. However, it is worth noting that since 2004, the top 1% of wage earners paid nearly 40% of all the income tax revenue collected. That is the highest share in the entire history of IRS maintained statistical data and is due primarily to the progressivity of the tax code rather than income concentration, according to analysis by Economic Policies for the 21st Century, a non-partisan economic policy and research non-profit organization. During the same recent period, the pre-tax share of total income of the top 1% has hovered around 20%, meaning the share of income taxes paid was twice as large as the share of income earned by the top 1%.
Warren Buffett for whom the tax is named has said he is grieved that he pays a lower tax rate (17.4%) than his secretary (35.8%). Buffett volunteered that he made in excess of $62.8 million last year, less than $40 million was "taxable" income by IRS definition, and that he paid $6.9 million in taxes. Virtually all of Buffett's income is from his investments which would be taxed as capital gains or dividend at 15%, except for any tax-exempt bonds he might own. Buffet also claimed large deductions for state taxes he paid and charitable donations.
For all of Buffett's grumbling about not paying enough in taxes, he seems to take full advantage of the incentives to reduce his bill to the IRS. One has to assume that he purposely takes less in salary and more in investment income to take advantage of more favorable rates. And, Buffett is a perfect example of why those incentives for capital investment are in our tax code – so people with money to invest do, and people with means support the plethora of worthy charitable causes. Capital investment is crucial to an expanding economy and job creation. The Buffet Rule would double the tax rate on investment income from 15 to 30 percent. Taxing it more will only naturally lead to fewer investment dollars flowing into the market discouraging growth, rather than promoting it as Obama falsely implies.
Further, companies pay numerous taxes in the course of doing business including a 35% corporate rate on profits, so capital gains and dividends are really another tax on the same investment capital. Drs. Robert Carroll and Gerald Prante of Ernst & Young LLP recently calculated what they call the "integrated" tax rates on capital gains and dividend income by combining taxes paid at the corporate and individual levels for the major developed countries of the world. They found the U.S. integrated dividend and capital gains rate of 50.8% is the fourth highest among OECD and BRIC member nations. Unless Obama and Congress can agree on an extension of the existing tax rates set to expire at the end of this year, the integrated dividend rate will rise to 68.6% - the highest among all nations measured. The integrated capital gains rate would increase to 56.7%; the second highest. At a time when many nations of the world are lowering rates to encourage capital investment and economic expansion, the U.S. is doing just the opposite and Barack Obama wants to push rates still higher.
The Buffett Rule is a campaign concoction built on the example of one man and his secretary that is virtually unique to anyone else on the planet. Good public policy for 330 million people should involve more than a single case study. When examined on a larger scale, Obama's "fairness" argument gets even weaker, and the progressive nature of the existing tax code becomes very apparent.
As the chart below demonstrates, according to IRS data for 2009, the top 1/10th of 1 percent of income earners in the U.S. was comprised of 138,000 individual or joint returns reporting adjusted gross income (AGI) of $1,432,890 or more. Unlike Buffett, the group paid an average tax rate of 24.28%, the highest rate of any group. Further, the top 5% of earners pay nearly 60% of all income taxes and average tax rates double far greater than the rest of the population.
Obama left a loophole in his millionaire's tax that Warren Buffett and every other seasoned investor would find like a fish goes to water – municipal bonds. Issued by local governments of all kinds, usually highly rated and insured, with zero tax liability, municipals have long been a favorite of private as well as institutional investors. The Buffet Rule legislation introduced in the Senate by Sheldon Whitehouse (D-R.I.) leaves that loophole wide open. Maybe the exemption was a legislative drafting oversight – or, maybe not. If lightning were to strike and the Buffett Rule became the law of the land causing other investment income to be taxed at 30% while municipal bonds were tax free – well, you can imagine the exodus of trillions from the private capital markets flowing straight to more government "investments."
Investors tend to be pretty smart, and even if they aren't, they hire people who are. They choose investments and strategies that maximize their returns while limiting both risk and taxes. And, If government changes the tax code they change strategy. If the tax burden is too high in the U.S. they can easily move their money overseas, and as already explained, foreign markets are already often more inviting.
At the White House on April 11, Obama paraded out a group of shills claiming they all were begging him to cleanse them of their guilt and let them pay more taxes. The only problem; "They haven't been asked to do their fair share," Obama said. All he needed to do is suggest they make out a check payable to the Internal Revenue Service in any amount they feel would be "fair" and the IRS would be glad to relieve their sense of shame.
The Buffett Rule won't and shouldn't be adopted – at least not with this Congress. Obama knows that. He's not playing Congress for a fool; Capitol Hill isn't even his audience. But, he is trying it on American voters. It's like a game of re-election rope-a-dope: to distract from the abysmal failure of his economic policies he resorted to a shameless game of the 99% vs. the 1%. But, instead of sleeping bags and tents on sidewalks, this game is being played out of the Oval Office.