Buffetted by Tax Hikes

National Review Online
Wednesday, April 11, 2012

Speaking in Florida (unemployment rate 9.6 percent, No. 1 in the nation for foreclosures), President Barack Obama reiterated his demand for a tax increase based on the so-called Buffett Rule, a non-solution to a non-problem intended mainly to distract from the administration’s non-solutions to real problems.

The Buffett Rule would function as a secondary alternative-minimum tax, putatively to accomplish what the primary alternative-minimum tax has failed to do: sock it to billionaires (“billionaires” here being defined in some instances as “individuals making $250,000 a year,” which is mathematically suspect). The case for the Buffett Rule is built upon a myth cultivated by President Obama, by Warren Buffett, and by many of their supporters and admirers: that high-income Americans pay lower tax rates than middle-class Americans. This is a falsehood, one that has been amply documented with data from the tax experts at the IRS and by the nonpartisan Congressional Research Service.

Legend has it that Mr. Buffett, most of whose income is taxed at the 15-percent long-term capital-gains rate, pays a lower percentage of his income in taxes than does his modestly paid secretary. This is almost certainly untrue. Even if Mr. Buffett were paying half that 15-percent rate — 7.5 percent — he still would be paying a higher rate than does the typical family in the $40,000-$50,000 range, whose effective rate is just 3.2 percent, according to the Tax Policy Center. Wealthy investors such as Mitt Romney and private-equity managers typically pay a rate of about 15 percent, since most or all of their income is derived from investments, which are treated preferentially. But even so, 80 percent of U.S. households pay a rate that is less than 15 percent, and about half of U.S. households pay no federal income tax at all.

Among U.S. taxpayers with incomes in excess of $1 million, most pay about 30 percent in taxes — the very rate proposed by the president under the Buffett Rule — while about 10 percent pay a considerably higher rate and another 10 percent pay 24 percent or less, according to the Congressional Research Service. That latter group is composed mostly of retirees and professional investors whose incomes take the form of capital gains rather than salaries and bonuses.

In absolute terms, high-income Americans pay practically all of the federal income taxes, and they pay a higher percentage of their incomes than do typical middle-class Americans. These facts are indisputable.

The president’s proposal is a dishonest one in that it relies in a popular falsehood to covertly pursue a separate policy goal: raising the capital-gains tax rate for professional investors. Seeking to encourage Americans to save and invest more of their incomes, Congresses and presidents of both parties have for years supported taxing income from long-term investments at a lower rate (usually 15 percent) than ordinary salary income. This policy reflects three important economic truths: 1.) investment is the lifeblood of the U.S. economy; 2.) long-term investing is the surest route to economic security for individuals and families; 3.) in most cases, the money used to make these investments already has been taxed as ordinary income, with a current top rate of 35 percent. That lattermost is significant: Even if you have any income left over to invest after paying the 35 percent federal income tax, the additional 15-percent tax is yet another disincentive to save.

According to congressional estimates, this tax hike would produce a grand total of about $5 billion a year in new tax revenue for the next ten years — or about four-tenths of 1 percent of the deficit President Obama and his congressional enablers ran up last year. Given that it would do practically nothing to reduce the deficit, and given that most high-income Americans already pay nearly 30 percent in taxes, and much more than the middle class in any case, what is the point? The only result will be to punish those Americans who earn most of their income through investing rather than through salaries.

If the Democrats wish to revoke the tax benefits given to long-term investments — say, on Americans’ retirement accounts — then let them do so openly, in the light of day, rather than furtively, based on a platform of what we might charitably call myths, if not outright lies. That reducing Americans’ ability to invest and save for their own futures would leave them more dependent upon Social Security, Medicare, and the like surely is not lost on Democrats, who profit from the increasing servility of the electorate. Americans should not be distracted by the Democrats’ class-warfare sleight-of-hand from the fact that the Democrats here are contemplating a purely punitive measure that will add yet another level of complexity to the tax code and create a new arterial blockage constricting the flow of the lifeblood of our economy.