Correcting President Obama’s Myriad Tax Fallacies

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published September 22, 2011 on

An emerging, disabling problem with our democracy is that increasingly we cannot even engage in intelligent public discussions of critical issues facing our country. The strategy of central political players today is to calculate what busy voters working hard and taking care of their families do not and will not know, and take advantage of that with abusive rhetoric that cannot be characterized as intellectually honest. Contributing greatly to that is the decline of what was formerly known as the mainstream media into effectively a party controlled press.

For example, for 30 years now the South American nation of Chile has demonstrated the enormous benefits to working people of empowering them with the freedom to choose personal savings, investment and insurance accounts in substitution for old fashioned social insurance programs hailing intellectually out of the late 19th century. Other countries have followed that lead in adopting similar reforms, including Great Britain and Australia. But in America we cannot even discuss this issue intelligently.

Or take the issue of global warming. Brave scientists soldiering on in pursuit of the objective truth are increasingly demonstrating the falsehood of the theory that human activities are threatening the planet with potentially catastrophic global warming. Their work is reported in thorough, careful, scientific publications such as the Heartland Institute’s 860 page Climate Change Reconsidered.

But many of our political leaders are engaged in play acting as if these scientists and their work don’t exist, and there is no scientific dispute over the theory. The media allies of these political leaders play along, refusing to report to their audiences the true scientific developments.

Now we see President Barack Obama engaged in this same game regarding federal tax policy and financing for a so-called jobs plan based on the same Keynesian theory that he just proved fallacious yet again, as has been proved over and over since the 1930s. Campaigning for reelection on Monday, Obama said:

Middle-class families shouldn’t pay higher tax rates than millionaires and billionaires. That’s pretty straightforward. It’s hard to argue against that. Warren Buffet’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it. It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million. Anybody who says we can’t change the tax code to correct that….They should have to defend that unfairness–explain why somebody who’s making $50 million a year in the financial markets should be paying 15 percent on their taxes, when a teacher making $50,000 a year is paying more than that–paying a higher rate. They ought to have to answer for it.

Let me explain it to you, Mr. President. The truth is that the unfairness you discuss is a fantasy. The facts are just the opposite.

Even before you were elected, Mr. President, under the tax policies adopted by President Reagan, House Speaker Newt Gingrich and the much vilified President George Bush, official IRS data for 2007 showed that the top 1% of income earners paid more in federal income taxes than the bottom 95% combined! The top 1% of income earners that year earned 22% of income but paid 40.4% of total income taxes. When Reagan became president, the top 1% paid 17.4% of income taxes, as I note in my recent book, America’s Ticking Bankruptcy Bomb. As Jack Kemp used to say, if you want to soak the rich, cut tax rates. Moreover, nearly the entire bottom 50% of income earners now pay no federal income tax on net as a group.

So if “the rich” are not paying their fair share, Mr. President, what would that fair share be? Based on these official facts, for you to run around the country telling America that we could have jobs and balance the budget and solve the debt crisis you are creating if the rich would just pay their fair share of taxes only demonstrates that you fundamentally do not understand the country that was so generous and kindhearted to elect you President without really knowing you.

As the Wall Street Journal further explained Tuesday, in 2008 official IRS data showed that taxpayers earning over $1 million paid an average federal income tax rate of 23.3%. Those earning between $500,000 and $1 million paid an average federal tax rate of 24.1%. As the Journal further elaborated, “that is more than twice the 8.9% average rate paid by those earning between $50,000 and $100,000, and more than three times the 7.2% average rate paid by those earning less than $50,000. The larger point is that the claim that CEOs are routinely paying lower rates than their secretaries is Obama hokum.”

Actually it is a Warren Buffett scam. His company that made him rich, Berkshire Hathaway, itself is a sophisticated tax shelter. If tax rates on dividends and capital gains are raised, that will only lead more of the wealthy to flee to investing in his company to avoid the abusive multiple taxation. The IRS claims that Buffett’s company owes a billion dollars in back taxes. If Buffett thinks the rich don’t pay their fair share, why is he fighting this? Why doesn’t he just pay his fair share as required under current law?

Moreover, the above discussion doesn’t even count the corporate income tax. America suffers from virtually the highest corporate tax rate in the industrialized world, nearly 40% on average counting state corporate income taxes. Even China has a 25% corporate rate. The average rate in the European Union, which is reputedly mostly socialist, is even less than that. In formerly socialist Canada, the corporate tax rate is 16.5%, slated under current law to fall to 15% next year. Compared to America, Canada has been booming since Obama was elected.

The Obama/Buffett ruse arises just like any other magician’s trick. It focuses attention on just one tax rate paid on income arising from capital investment – the capital gains tax rate of 15%. The florid abusive rhetoric distracts from the multiple taxation of capital investment income, which is actually taxed at least four separate times under our tax code. Capital investment income is taxed first by the above mentioned, abusive, internationally uncompetitive corporate income tax. If any is paid out as dividends, then it is taxed again by the individual income tax. If the value of the capital interest, say a share of stock, manages to increase in the Obama depression, then it is taxed again by the capital gains tax. If anything is left at death, then it is subject to taxation again by the death tax.

That is how the top 1% of income earners ends up paying more than the bottom 95% combined. And it is why the average tax rate paid by millionaires is three times the average rate paid by the middle class.

On the basis of his abusively misleading rhetoric, Obama in his campaign speech on Monday called for $1.5 trillion in increased taxes. That would be on top of all the tax increases for which Obama has already won enactment under current law for 2013. In that year, the tax increases of Obamacare become effective, and the Bush tax cuts expire, which Obama has refused to renew for the nation’s small businesses, job creators, and investors.

As a result, the top two income tax rates will go up by nearly 20%. The capital gains tax would soar by nearly 60%. The tax on dividends would nearly triple. The Medicare payroll tax would rocket up by 62% for these disfavored taxpayers. That is all on top of virtually the highest corporate tax rates in the industrialized world, and before the new tax increases President Obama called for on Monday.

President Obama said in his campaign speech on Monday that Congress should pass his jobs plan “knowing that every proposal is fully paid for,” supposedly by that $1.5 trillion tax increase. But the President’s proposed tax increases don’t have a prayer of raising nearly that much.

Obama and Buffett are blowing so much smoke over the 15% rate on capital gains and on dividends adopted in the Bush years. But over the last 40 years, every time the capital gains tax rate has been cut, revenue has gone up. And every time the capital gains tax rate has been raised, revenue has gone down.

The reason for this is that when the capital gains rate was cut, more taxpayers sold their capital and realized their gains, and a rising stock market produced more gains. When the rate was increased, more taxpayers held on to their capital and a declining stock market cut off the gains.

Maybe the estimate Obama gives for his tax increase will be endorsed by the Congressional Budget Office and Joint Tax Committee. But in 1997, Congress was considering a cut in the capital gains rate from 28% back down to 20%. The Joint Tax Committee (JTC) estimated that as a result revenues would increase by $7.8 billion from 1997 to 1999, but the tax cut would produce a loss of $28.8 billion over the following 7 years, for a net loss of $21 billion over the 10 year period.

The actual numbers after the tax cut was passed showed an increase of $84 billion over the pre-tax cut projections for 1997 to 2000. Despite an almost 30% cut in the rate, capital gains revenues rose from $62 billion in 1996 to $109 billion in 1999.

Similarly, when Congress considered cutting the capital gains rate again in 2003, from 20% to 15%, the JTC estimated that this would cause a loss of revenue of $5.4 billion from 2003 to 2006. But after Congress passed the tax cut, capital gains revenues increased by $133 billion during those years, as compared to the pre-tax cut projections. As Dan Clifton of the American Shareholders Association said, “There is no excuse for this $138 billion error.” Capital gains tax revenue doubled from 2003 to 2005 despite a 25% cut in the tax rate.

Similarly, when the tax rate on dividends was cut to 15% in 2003, dividends paid soared, and so did the resulting revenue.

So if we effectively raise these rates again under President Obama’s proposals, revenues will most likely decline rather than rise. If those tax increases push the economy back into recession, federal revenues will decline across the board, and the national debt will soar further.

Moreover, what creates jobs is capital investment. The result of all of Obama’s tax increases on capital investment would be even less such investment, which means even fewer jobs. If the prospect of those tax increases drives the economy back into recession, unemployment will soar further, along with government spending, deficits and debt.

If you try to rob the rich, you only end up stealing from the poor and working people. That is because the poor and working families have the most to lose when the economy turns bad, as they lose the jobs and wages they need to maintain a basic standard of living.

All of those tax increases are to finance a so-called jobs plan which is really just a federal bailout of spendthrift states. About half of the $450 billion in increased federal spending under the plan goes to states to keep full employment of “teachers, policemen, and firefighters,” and for “infrastructure that states have already decided they don’t need or have deemed a low priority,” as AEI Executive Committee member Henry Golub rightly explained it in the Wall Street Journal yesterday. This after half the infrastructure spending in the first, 2009 stimulus bill has not been spent yet. Financing this with a $1.5 trillion tax increase on the nation’s small businesses, job creators and investors could not more obviously be a whopping job loser.