James Pethokoukis

Politics and policy from inside Washington

Obama’s vague Buffett Rule a political ploy

September 19, 2011

A few thoughts on the economics and politics of President Obama’s tax-the-rich “Buffett Rule” and new debt reduction “plan”:

1) What problem does the Buffett Rule address (assuming it is something more than just a campaign talking point or vague guideline)? Rising inequality? Inequality has been rising globally for years due to globalization and technology. Higher taxes on the rich won’t help that. The biggest economic problem America faces right now is slow economic growth.

2) Would the Buffett Rule reduce the budget deficit at all? That’s far from clear. Higher taxes on small business and entrepreneurs would slow growth and reduce tax revenue. It would also encourage greater efforts at tax avoidance. The 1993 Clinton tax hikes, for instance, only generated a third of the revenue that CBO forecasted. And those increases were instituted when the economy was growing at a steady 3% clip, not stuck in slow-growth mode like the U.S. economy currently is. From Obama’s speech, the it seems to me that the Buffett Rule is probably a special capital gains tax rate of 28 percent for people making $1 million a year.

3) Obama still declines to release a long-term, multi-decade debt reduction plan of the sort Rep. Paul Ryan has put together. I think the reason is clear: If Obama were to do that, it would be crystal clear to voters that the only way Obamacrats can pay for permanently higher levels of government spending is through permanently higher levels of tax revenue, including higher taxes on the middle class. As I wrote a couple of months back:

Three liberal think tanks recently devised budgets to put the U.S. government on a sustainable fiscal path through 2035. Their plans, collectively, called for Washington to collect an average of 23.6 percent of GDP vs. the post-World War II average of 18.5 percent. To put that in further perspective, the highest level of tax revenue that Uncle Sam has ever taken is 20.9 percent in 1944.

And to reach such a stratospheric level of taxation, these groups are calling for unprecedented tax hikes via millionaire surtaxes, higher taxes on alcohol and tobacco, securities transaction taxes, higher taxes on capital gains, higher taxes on corporations, higher death taxes, carbon taxes, and gasoline taxes. None of which, supposedly, would hurt economic growth. Even worse, all those tax hikes would still fail to balance the budget. And when you move past 2035, taxes would almost certainly need to go even higher.

4) OK, the top 1% of US taxpayers make 20% of income and pay 40% of taxes. Isn’t the tax code already “progressive?”

5) The Solyndra scandal revealed Obamanomics to be mostly a clever, crony-capitalist scheme to launder taxpayer money through favored special interests and then back into Democrat campaign coffers. This new budget and tax plan reveals the other: a plan to redistribute rather than create wealth.

 

Comments

Two things stand out in this column. First is in #2 where you equate the “Buffett Rule” with “small business and entrepreneurs”. This is a rate that applies to earned income, not other forms of income. This is for people who are paid a salary of $1M AFTER deductions. Trying to lay those people off as “small businesses” is silly, and the vast majority of “entrepreneurs” don’t make $1M. Lumping them in with the “Buffett Rule” is disingenuous.

The second is #4, which uses two unrelated data points to distort info. When this stat was created 20% of income meant earned income, not all sources of revenue. And the 40% of taxes is only income taxes, not all taxes. For some reason the right thinks the only tax is federal income taxes, but it ain’t. When you factor in payroll, sales, property, state, gas, and other taxes the top 20% pay far less than 20% of all taxes.

Posted by fungible | Report as abusive
 

What’s vague about eliminating the deficit generating Bush tax cuts and returning the to the Clinton tax rates.

35% – 39.6%

Not enough to change a millionaires lifestyle.
That would go toward helping to create more jobs,
and bring down the debt. More people working is better
for employees, the businesses they spend money with and investors.

Posted by MrUniteUs1 | Report as abusive
 

I would be agreeable to a return to those tax rates in exchange for a return to just the 2008 levels of spending. This problem must be addressed on both ends of the equation. However, the disparate growth in government under this president is the first course correction we need to make.

Posted by Liggie | Report as abusive
 

Pethokoukis is shilling for Cato and American Enterprise again who have constantly ranted that taxing the rich is bad economics. What Pethokoukis fails to point out is the superior economic growth in countries that have very high marginal tax rates on high incomes: Germany for one.

The huge, huge tax give away that Bush2 tax cuts started was not so much in earned income (W-2 income) but in dividends, capital gains, derivative income, partnerships, etc. (1099, 1098, K-1 income) where rates can be as low as 10%. While middle class America has seen payroll taxes triple in 25 years, the 0.5% of top earners that own 75% of equities in this country saw their dividend tax rate drop from 70% (pre 1983) to 15% (current Bush2 tax rate).

If lowering taxes on dividends and capital gains had any correlation to economic growth, the current great recession certainly has refuted that premise. THis was the whole argument from the conservative think tanks throughout the 80s and 90s – and we still hear it from the Republican party – lower taxes on the rich will trickle down to the masses. The stark reality of the 21st century has proven how wrong they are.

Furthermore, the low short term capital gains tax rates and low rates on derivatives has fed speculation which is destroying the financial markets worldwide.

In short, Obama’s plan is not only sound for the fiscal situation, but sound economic planning.

Posted by Acetracy | Report as abusive
 

I’ve got a solution to that quandary with earned income versus deductions. What if you lowered the deductions if their earned income fluctuated? Earned income is always in flux. Their portfolios and investments always fluctuate when demand and supply oppose each other, affecting their earned income. That means that there would essentialy be no benefit justification for heads of business to assign themselves anymore compensation than the supply and demand ratio dictates. This essentialy means it could cost them more in hard times and cost them less when times are good. This also would essentialy force businesses to invest even though their earned income is flat, increasing the relativity of the competion in concordance with their own respective market. Equities get earned income too.

Posted by laguardia23 | Report as abusive
 

James! We hear you are moving to The Privatize America–I mean The American Privatize–I mean the American Enterprise Institute! We will all miss giving the daily smackdown to your Koukonomics Kolumn, but since I also have an account at Investor’s Birch-society Daily, I can’t wait for your columns to appear there.

You really should have stayed at Reuters, one of the only real news agencies left. It gave you credibility you will never have at AEI.

Posted by GetpIaning | Report as abusive
 

Leaving? Darn. Stop back, though, and join us in the comments sections once-in-a-while.

I think that you are correct (and were three months ago) in wondering if tax increase of any sort would benefit America, due to the fact spending is still not curtailed.

I’d like to throw in something that I just read today from “Issue Number: IRS-2011-94 NEWSWIRE”:

(quote)”“My goal all along was to get people back into the U.S. tax system,” Shulman said. “Not only are we bringing people back into the U.S. tax system, we are bringing revenue into the U.S. Treasury and turning the tide against offshore tax evasion.”

In new figures announced today from the 2009 offshore program, the IRS has $2.2 billion in hand from taxes,
interest and penalties representing about 80 percent of the 2009 cases that have closed. These cases come from every corner of the world, with bank accounts covering 140 countries.

The IRS is starting to work through the 2011 applications. The $500 million in payments so far from the 2011 program brings the total collected through the offshore programs to $2.7 billion.”(unquote)

Where is all that money right now? Shulman wrote that
it was in the U.S. Treasury. (I can’t believe that, though.)

Well, I just also read that Sec. Sebelius wrote a check last week for one million dollars on her own accord for a private group in New Hampshire because that state wasn’t going to fund that private group anymore. This check represented one million dollars in NEW spending! AND this new spending wasn’t directly authorized by Congress.

Maybe instead of jumping to mess with the huge tax code, maybe America should clean up the leaky purse first. America has to know what is being debited and what is being credited….and then try to make them balance.
How hard is that? Really hard when you don’t know where you are to start with!

Posted by limapie | Report as abusive
 

It’s time for the “Net Worth Tax”. Income and payroll taxes attack the production of wealth, stifling growth and restricting the accumulation of wealth (“the rich get richer”), while the wealthy, such as Mr. Buffet, accumulate more.

Why not tax all wealth, instead of wealth production? It seems a very simple task to require each citizen to report an annual Net Worth statement to the IRS, detailing assets & liabilities (real-estate, stocks, bonds, mutual funds, collectibles, savings, etc. . . . including offshore bank accounts) and a simple flat tax be paid monthly to the IRS, eliminating the withholding of income, social security, and medicare payroll taxes.

This Net Worth Tax, would answer both political sides by truly “taxing the rich,” and unfettering societies’ wealth producers, creating growth like never seen before. Nay sayers will say it would be impossible to enforce accurate reporting. However, I don’t see where enforcement would be more difficult than current complicated system of reporting income and deductions. Failure to report accurately would result with similar punishments

Posted by commonsense10 | Report as abusive
 

Before we raise taxes shouldn’t we first consider the value of govenment? Federal and state governments services have expanded far beyond what is reasonable (provide for security, clear air and water, etc.) and certainly beyond their level of competence. They are creating problems for which they can provide a solution; a bit like Cadilliac offering a motor to close the trunk windshield wipers that start automatically (clealy solutions for problems we do not have).

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