The Buffett Rule: Obama’s Community Organizer Understanding of Taxation
This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published April 12, 2012 on Forbes.com.
President Obama has a community organizer understanding of America’s taxes. His rhetoric doesn’t recognize that under our tax system the earnings from capital investment are taxed not once, but multiple times.
First, by the corporate income tax, then again by the individual income tax through the tax on dividends, then if you sell the capital investment, through the capital gains tax, then when you die, by the death tax. When he complains that the rich are not paying their fair share, he is just looking at the rate on any one of these taxes, and not considering all of the others. So he wants to raise them all for those making over $1 million per year to what he considers the tax rate paid by the middle class, which he calls the Buffett rule.
As a result, Obama would increase the top capital gains tax rate by 100%, increase the top tax rate on dividends by 100%, increase the top two income tax rates by nearly 20%, and increase the death tax rate by nearly 60%, while the corporate tax rate remains the highest in the industrialized world. The capital gains tax rate under the Buffett Rule would be the fourth highest among OECD nations, as the Wall Street Journal noted on Wednesday.
The Heritage Foundation explained it like this on Wednesday. The taxation of capital is like a trip on a toll road, where you have to pay $3.50 to get on the road, then $3.50 at a toll booth on the road, then a $1.50 toll to get off the road. Obama’s understanding of the tax code is like saying the toll for this trip is $1.50, which is somehow unfair to those who take the bus on the same route for a $3.50 total fare (assume the bus is exempt from the tolls). So he thinks the toll to get off the road should be $3.50 as well.
But Warren Buffett is more than happy with Obama’s proposals. That’s because his Berkshire Hathaway is effectively the largest tax shelter in the nation, partially shielding its investors precisely from the multiple taxation of capital. So raising tax rates sharply to make that multiple taxation far worse will just mean more customers for him. Buffett’s company is like a subway next to the road that only charges $1.50 total fare.
As the Journal further observed on Wednesday, however, “IRS data show that middle-class workers on average pay just under 15% of their income in federal taxes, while the richest 0.1% pay almost twice as high a rate on average, or 26%.” That’s for all federal taxes.
Indeed, for 2007, before President Obama was even elected, official IRS data shows that the top 1% paid more in federal income taxes than the bottom 95% combined! The top 1% that year paid 40.4% of all federal income taxes, almost twice the share of income they earned. Sounds like “the rich” are already indisputably paying their fair share, at least.
Moreover, Obama’s own Treasury Department projects that the Buffett Rule tax would raise only about $5 billion a year, less than one half of one percent of the deficit for this year. Over the next 10 years, it raises less than 0.1% of the $47 trillion President Obama proposes to spend in his 2013 budget.
But the resulting revenue won’t be anywhere near that. Over the last 45 years, every time the capital gains tax rate has been raised, revenues have declined, with neither CBO nor Treasury or Congress’s Joint Tax Committee getting it right once. Moreover, when the top tax rate on dividends was cut to 15% in 2003, dividends paid soared thereafter, increasing the resulting revenues. Raising the tax rate on dividends and capital gains back up will result in lower, not higher, revenue, raising federal deficits and debt even more.
Of course it’s worse than that. Besides the Buffett Rule tax increases, the Obamacare taxes go into effect next year, with an additional tax on investment income, including capital gains and dividends. In addition, the Bush tax cuts expire, further increasing tax rates for capital gains and dividends, as well as individual income tax rates. With the conflux of all the tax rates of all the layers of the multiple taxation of capital rising towards the highest in the world, along with Obama’s regulatory tsunami surging to a crescendo, and causing soaring energy costs, the result will be renewed, double dip recession next year.
That will mean federal revenues further collapsing across the board, with federal deficits and debt soaring even more. Working people will suffer the most, as unemployment skyrockets back into double digits, and real wages fall further with declining labor demand. Most taxpayers earning over $1 million a year are owners of small businesses. In fact, most are the small businesses themselves reporting on individual returns as the individual’s business income. But most new jobs are created by small businesses. Raising taxes so sharply on them is just going to kill still more jobs.
Art Laffer predicted the coming crash of 2011 on the basis of the expiration of the Bush tax cuts on the upper-income earners alone. Those tax-rate increases were delayed to 2013 out of fear that the prediction was right. But in 2013, in addition to those tax-rate increases, we will have all of the tax increases of ObamaCare, the further exploding costs of Obama’s building regulatory tsunami, including soaring energy costs (effectively another major tax increase), and, if Obama gets his way, the add-on tax rate increases of the Buffett Rule. Unless we reverse course, the result will be another big, bad crash in 2013.
If President Obama wants Warren Buffett to pay the same tax rate as his Secretary, he can support a flat tax, which would promote booming economic growth and prosperity, rather than cratering the economy. But Obama shows no understanding of how the incentives of lower tax rates promote economic growth. The higher the rate, the less the reward, the less the incentive. The lower the rate, the higher the reward, the greater the incentive. Or as the Journal further explains regarding Obama’s Buffett Rule, “The problem is that this is a tax on capital that is needed for firms to grow and hire more workers. Mr. Obama says he wants an investment-led recovery, not one led by consumption, but how will investment be spurred by doubling the tax on it?”
Obama refuses to even consider that lower tax rates involve pro-growth incentives, because it is against his redistributive religious doctrine. Read the transcripts of his speeches, and you will see that in his mind the engine of economic growth is not pro-growth incentives but government spending, which he calls “investment.” He said in Florida this week “we’re not going to stop investing in the things that create real and lasting growth in this country just so folks like me can get an additional tax cut.” Indeed, people like him should not ever get any tax cut, because he has no idea how to invest to create jobs. But it is the incentives of tax rate reductions for real entrepreneurs that create real jobs and booming prosperity, not government spending. But to Obama, those rate reductions just involve the loss of more valuable government funds that can be put to truly good use.
So Obama said in Florida, “We’re not going to stop building first class schools and making sure they have science labs in them.” Yes, first class schools with science labs in them perhaps promote economic growth. But how much of the $47 trillion in federal spending over the next 10 years Obama proposes involves paying for school science labs, or even for building the entire schools themselves? A negligible fraction.
He said, “We’re not going to fail to make investments in basic science and research that could cure diseases that harm people….” Yes, but again only a negligible fraction of his $47 trillion in proposed spending goes for basic science and research to cure such diseases.
He said we are not going to cut the federal spending to “create the new technology that ends up creating entire jobs and industries that we haven’t seen before.” But government spending does not create such technology or such “entire jobs and industries that we haven’t seen before.” Only private markets can do that. But because Obama is at his core a community organizer, he doesn’t understand that. That is why he is actually unqualified to be President, and unable to lead our country to economic revival and restoration.
Obama cannot even understand the pro-growth tax reform proposed by House Budget Committee Chairman Paul Ryan. He said in Florida, “if Republicans in Congress were truly concerned with deficits and debt, then I’m assuming they wouldn’t have just proposed to spend an additional $4.6 trillion on lower tax rates, including an average tax cut of at least $150,000 for every millionaire in America.” But Ryan’s proposed tax reform is revenue neutral, with CBO projecting revenues will nearly double over the next 10 years under his proposed reforms.
Pro-growth tax reform is supposed to involve, just like Ryan’s proposed reforms, reducing tax rates and closing loopholes. But Obama’s tax policies involve just the opposite, raising tax rates and adopting new loopholes, like his many redistributionist and “green energy” tax credits. Maybe that is why Obama’s budget got exactly zero votes on the House floor, without even one Democrat voting for it, while Ryan’s budget passed.
Finally, Obama claimed in Florida that his tax policies were just following the path trailblazed by Ronald Reagan, who he said also wanted to close “certain tax loopholes [that] make it possible for multimillionaires to pay nothing, while a bus driver was paying 10 percent of his salary.” But Obama’s tax policies are the exact opposite of Reagan’s, who made that point cited by Obama in campaigning for his 1986 tax reforms. Those reforms cut the top tax rate from 70% when he entered office all the way down to 28%, with a 0% rate for the poor and a 10% rate for what Obama calls the working class. Obama in sharp contrast is raising the top tax rate of every federal tax, except the corporate rate which is already the highest now in the industrialized world.
We have a President who is trying to peddle to us here the exact opposite of reality. Could he be that hopelessly confused? Or does he think you can be so easily confused? Either way America cannot be so foolish as to abide a President talking to us so out of touch with the real world.