By Peter Ferrara
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.
