RALEIGH – As President Barack Obama’s latest, lamest attempt to stir up class warfare against “millionaires and billionaires” has quickly devolved into ridiculous farce, it may seem uncharitable of me to pile on. But I feel compelled to make three observations about the president’s new tax proposals and the “Buffett Rule” on which they were based.
First, the underlying premise is utterly false. In the pages of The New York Times, investor Warren Buffett famously claimed that his effective tax burden was lower than his secretary’s. Although Buffett hasn’t seen fit to release his tax returns as documentation for his assertion, what he appears to mean is that because of the lower marginal rate on dividends and capital gains in the federal tax code, the amount of income tax he paid to the federal treasury was a lower percentage of his income – which derives mostly from investments – than his secretary’s tax bill was as a percentage of her mostly wage income.
As anyone with at least a passing familiarity with tax-policy analysis would know, Buffett was leaving out a critical piece of information. The very reason that dividends and capital gains bear a lower tax rate than wage income is that, unlike wages, they are not deductible from corporate income taxes.
That is, if you receive income from owning or selling corporate stock, that income has already been taxed at the corporate level. The same is not true for wages. So unless you make dividends and capital gains deductible to some entity – either the corporation or the shareholder – investment income is double-taxed.
Under the current system, which levies a lower personal tax rate on investment income but not a zero rate as tax neutrality would require, most of Buffett’s income is taxed at a higher effective tax rate than his secretary’s wages. He may not be writing a personal check for all those taxes, but he bears their cost in the form of lower returns.
The second observation I’ll make about President Obama’s claims is that they are not just misleading but intentionally so. Perhaps Warren Buffett is under the sincere impression that his tax burden is lower than his secretary’s, but Buffet is neither a politician nor a tax expert. The fact that he doesn’t know what he’s talking about is his own business. But those who repeat his error in partisan rhetoric or “expert” political commentary ought to know better.
With an administration full of supposedly brilliant people, the president has no excuse for repeating Buffett’s false claim. Someone should have flagged it. Unfortunately, the most likely scenario is that someone did, but Obama and his political aides chose to concoct their “Buffett Rule” nonsense anyway on the hope that it would stoke his liberal base and inflame anxious voters with the politics of envy.
Finally, the president’s line of attack is incompetent. While many Americans are indeed susceptible to the politics of envy – it has been one of the standard tools of the American demagogue for generations – they are also sensible enough to realize that “tax the rich” is a policy insufficient to the task of deficit reduction and ill suited to the task of job creation.
You could levy a 100 percent tax on the incomes of millionaires and billionaires and scarcely move the needle measuring American’s indebtedness. By far the biggest threat to the country’s long-term fiscal health is the unsustainable growth of entitlements. And in the short run, the problem is slack growth, not insufficient tax rates.
As I have previously argued, economic recovery would return federal revenue collections as a share of gross domestic product to their historical average without any need to raise federal tax rates. But recovery won’t pull federal spending down far enough to bring the budget into balance. Only fiscal restraint can do that.
I’ve also reported that, according to honest liberals, America’s tax system is progressive, not regressive. The wealthy pay significantly more of their incomes in federal, state, and local taxes than the middle class or the poor do.
Yes, there are honest liberals. I’m sad to say that the president is not one of them.
Hood is president of the John Locke Foundation.