This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published August 18, 2011 on Forbes.com.
Warren Buffet is performing a gross public disservice in creating urban myths about the nature of the tax system in America. Those myths will mislead millions of Americans about the fundamentals of their own country.
Buffett began his media offensive with an op-ed in the New York Times on Sunday, “Stop Coddling the Super Rich,” where he complained that taxes need to be raised on “the rich” so they can pay their fair share. He reported that he paid 17.4% of his income in federal taxes, and claimed “If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.” That is inaccurate.
Official IRS data shows that for 2007, before President Obama was even elected, the top 1% of income earners paid more in federal income taxes than the bottom 95% combined. That top 1% paid 40.4% of all federal income taxes, almost twice their share of income. When Ronald Reagan entered office, the top 1% paid 17.6% of all federal income taxes. That is why Jack Kemp always used to say if you want to soak the rich, cut tax rates.
President Obama’s tax rate increases, already adopted in current law for 2013, apply to singles making over $200,000 a year, and couples making over $250,000. That is roughly the top 3% of income earners. The latest IRS data shows that the top 3% of income earners pay more in federal income taxes than the bottom 97% combined. Indeed, the bottom 50% of income earners today as a group pay no federal income taxes on net. So if the rich are not paying their fair share, what would their fair share be, Mr. Buffett?
The facts are similar in many of the highest taxed states in regard to their own state income taxes. In California, the top 1% pay 48% of all state income taxes. In New York, the top 1% pay 41% of all state income taxes. In New Jersey, until recently the top 1% paid 46% of state income taxes.
Moreover, America’s corporate income tax rate is virtually the highest in the industrialized world at nearly 40% on average, counting state corporate rates. Even Communist China has a 25% corporate rate, with the average in the mostly socialist European Union below that. In formerly socialist Canada, the corporate rate today is 16.5%, scheduled to fall under current law to 15% next year. Does this sound like the rich are not paying their fair share, Mr. Buffett?
Yes, many corporations exploit loopholes that greatly reduce their tax burden, which greatly reduces the average corporate tax rate. But those special interest loopholes hurt rather than promote economic growth and prosperity. It is the top marginal tax rate on the next investment that most affects the economy. With Obama corporate cronies like General Electric exploiting those loopholes to avoid paying any income taxes, eliminating those loopholes is a top free market reform. But doing this in return for lowering the rates is what tax reform is all about, which would probably increase the average corporate tax rate.
That can be done reducing the top federal corporate rate to somewhere between 15%, as proposed in my book America’s Ticking Bankruptcy Bomb, and 25% as House Budget Committee Chairman Paul Ryan proposes in his budget that passed the GOP House. The individual income tax can similarly be reformed, which would probably increase Buffett’s average tax rate, while lowering the top rate, perhaps as Ryan proposes to 25% for those making over $100,000 a year, with a 15% rate for those making less than $100,000.
Yet in 2013, under current law, the tax increases of Obamacare go into effect, and the Bush tax cuts expire, increasing the top tax rates for every major federal tax, except the already too high corporate tax. Even if the Bush tax cuts expire only for those disfavored taxpayers Obama thinks are making too much, the top two income tax rates would go up by nearly 20%, the capital gains tax rate would go up nearly 60%, the tax on corporate dividends would nearly triple, and the Medicare payroll tax would go up 62% for the nation’s small businesses, job creators and investors.
The above are the central reasons – along with rocketing regulatory costs and a weak dollar – why there is a capital strike in America and even capital flight that is killing the prosperity of working people. Raising tax rates means producers keep less of what they produce, so incentives are reduced for all productive activities – savings, investment, starting businesses, expanding businesses, job creation and work. Working people lose the most, because the result is fewer jobs and lower wages than otherwise, which are essential to their basic prosperity.
Lowering tax rates means producers keep more of what they produce, so incentives are increased for all productive activities — savings, investment, starting businesses, expanding businesses, job creation and work. Such incentive effects were proven extremely powerful in the 1920s, 1960s, 1980s, and even 2000s. Each time, the economy boomed, jobs exploded, family incomes grew rapidly, and revenues actually increased. After the much vilified Bush rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs and the unemployment rate fell from over 6% to 4.4%.
And the proof of this analysis continues today. The above are the reasons why, even though since the Great Depression recessions in America have previously lasted 10 months, with the longest previously lasting 16 months, that we, 44 months after this last recession started, are still burdened by an unemployment rate above 9%. This is the longest period with unemployment this high since the Great Depression, with no real recovery in sight.
For millions of Americans, it is already a Depression — overall black unemployment over 15% for 2 years, double digit Hispanic unemployment near 12% for two years, teenage unemployment near 25%, black teenage unemployment near 40%. A total of 25 million Americans are unemployed or underemployed, making a real rate of the unemployed and underemployed of 16%. Real wages are falling, and the number of Americans in poverty is at an all time record.
Congratulations, President Obama, Warren Buffet, and all of those unthinking, simple-minded, religiously devoted leftists who support them. If the comprehensive tax rate increases now scheduled for 2013 are not reversed, the result will be a double dip recession that will make the entire period look precisely like a depression scenario.
A central factor that Buffett doesn’t understand is the multiple taxation of capital. He complains about the 15% capital gains tax rate as unfair, since his secretaries pay higher income tax rates. But the capital gains tax is only one layer of taxation on capital income. Capital income is also subject to the corporate income tax, the individual income tax, and the death tax. As the Wall Street Journal explained yesterday,
Mr. Buffett makes most of his income from his investments, particularly from dividends and capital gains that are taxed at a rate of 15%. What he doesn’t say is that much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall rate on that corporate income closer to 45%.
The Journal explains the economic effect,
This onerous tax on capital is a U.S. competitive disadvantage in the global economy, which is why Congress agreed in 2003 to cut the rates on dividends and capital gains. Even as the rest of the world is cutting tax rates on corporate income, Mr. Buffett wants to raise U.S. rates in a way that would make America less attractive for investment. Under a sensible tax reform, the feds would impose either a corporate tax or a dividend and capital gains tax, but not both.
This means that even the 15% capital gains and dividends tax rates on top of the corporate tax rate are unfair, economically counterproductive, multiple taxation. The current tax code enshrines the morality of pirates, or of Jesse James, who explained that he robbed banks because “that’s where the money is.” But, again, the karma of that morality hurts working people and their families the most.
This is why over the last 45 years every time the capital gains tax rate has been raised, capital gains revenues have declined, and every time the capital gains tax rate has been cut, capital gains revenues have risen. What sense would it make to raise capital gains rates and lose revenues, Mr. Buffett? That would be all loss and no gain, genius.
Another factor that Buffett doesn’t understand is the maximum taxable income limit for the Social Security payroll tax. Social Security benefits are calculated based on your income history. Only the income on which you pay taxes is counted. So the limit is not an unfair loophole. You don’t pay taxes on income above the limit, but you don’t get benefits for that income either. That is because Social Security is a contributory program that only replaces a floor of wage income in retirement. Once your retirement income is above that floor, there is no good reason to force taxpayers to pay more for higher benefits, especially because Social Security pays such poor, below market returns on tax payments into the program, actually negative real returns for higher income workers.
In my book I propose allowing workers the freedom to choose to save and invest some and eventually all of their payroll taxes in their own personal savings, investment and insurance accounts. That would transform the highest tax most working people pay into a personal family wealth engine that over a lifetime of savings and investment would accumulate to close to a million dollars in real terms for two-earner average income families. This is what those concerned about tax fairness should be supporting.
The Journal started its editorial yesterday on Buffett’s tax confusions by saying, “Barry Kilgore, the man who made the Wall Street Journal into a national publication, was once asked why so many rich people favored higher taxes. That’s easy, he replied. They already have their money.” But my own son, soon to graduate from college, who understands people and their motivations better than most, had a better insight. “Buffett just likes the attention,” Peter Ferrara, Jr. explained.