Americans have finished paying their taxes, according to Tax
Freedom Day, which fell on April 17. But some of them should be
paying a lot more, says President Barack Obama.
He wants rich people to pay a higher tax rate than their
secretaries. Hence his support for the so-called Buffett Rule.
However, it turns out the president pays a lower rate on his income
than does his secretary. He should write an extra check to Uncle
Sam.
The president has been on the campaign stump talking up the
Buffett Rule, which would require anyone making more than a million
dollars a year to pay at least 30 percent in taxes. The measure
didn’t get out of the Senate, but that might make it an even better
political issue for President Obama. At least it would if he —
rich by any normal definition, though he didn’t make more than a
million dollars last year — wasn’t violating the very rule he was
promoting.
The proposal doesn’t make much sense as public policy. The top
one percent of Americans actually pays an effective tax rate of
29.5 percent. The disparity of which the president complains
reflects
the difference in tax rates for earned income and investment
income. Much of the latter is generated by investing the
former, which already has been taxed. There’s no right or wrong tax
rate in principle for either kind of income.
Moreover, the federal government already imposes the so-called
Alternative Minimum Tax, which is supposed to set a minimum rate
for the rich to override the effect of tax preferences. The AMT was
created in 1969 after the revelation that 21 millionaires had not
paid any income tax two years before.
However, the AMT is not indexed for inflation and increasingly
covers the middle class. In 2008, 27 percent of those who paid the
AMT made less than $200,000 a year. Every year Congress passes a
temporary “patch” to override the AMT, since otherwise it would hit
millions more Americans. More sensible would be congressional
action to “fix” the AMT, whatever that means, than to add a new
super-AMT under the guise of the Buffett Rule on top of the
existing broken AMT.
Nor would the Buffett Rule collect much cash. The top one
percent of taxpayers already pays 38 percent of total income taxes
collected. The top five percent pays 59 percent. The top quarter
pays 86 percent.
Turning the Buffett Rule into law would raise an average $4.7
billion a year. That sounds like a lot of money, but the deficit
this year is expected to run $1.2 trillion. If enacted, the
president’s budget would add about $3.4 trillion in red ink over
the next decade to a collective deficit already predicted to run at
least $3 trillion. The official national debt is more than $15
trillion. The real unfunded liability for Social Security and
Medicare likely exceeds $100 trillion. The president’s proposal
might assuage a bit of envy, but it wouldn’t do much to improve
federal finances. For this reason even Barack Obama admitted that
the Buffett Rule was a “gimmick.”
Worse, though, the president appears to believe in the political
equivalent of cheap grace. The Obamas are rich, or rich enough —
currently in the top .5 to one percent of earners. Moreover, they
have been making well over a million dollars annually from their
books; $844,585 was their worst year since 2004.
Yet the president is failing to meet what he claims to be a
fundamental moral duty. Rather than do the right thing, he’s
handing the issue off to government. “Under the president’s own tax
proposals,” declared White House press secretary Jay Carney, “he
would pay more in taxes while ensuring we cut taxes for the
middle-class and those trying to get into it.” However, President
Obama knows Congress won’t act. He is calling for higher taxes
while he and his wife are pocketing their outrageously high
earnings.
Treasury Secretary Timothy Geithner — who before his
appointment had a little problem paying taxes that were legally due
— claimed that “Just because Republicans oppose this does not mean
it’s not the right thing to do and not the right thing to push
for.” But surely that doesn’t mean the president should not do the
right thing on his own if Republican opposition kills his
proposal.
Last year the Obamas grossed $844,585. Their adjusted gross
income was $789,674. Their itemized deductions ran $278,498. Their
total tax due was $162,074. That’s less than 20 percent on gross
and barely more than 20 percent on adjusted gross. In contrast, say
administration officials, his secretary, Anita Breckenridge, paid a
higher rate on her income of $95,000.
The president’s aides put the best face on things. “The
president’s secretary pays a slightly higher rate this year than
the president on her substantially lower income, which is exactly
why we need to reform our tax code and ask the wealthiest to pay
their fair share,” said White House spokeswoman Amy Brundage.
Instead of waiting for Congress to act, however, the president
should pay the $73,628 necessary to make the 30 percent level on
the Obamas’ AGI, or, better yet, the $91,302 to make the 30 percent
level on their gross income. The easiest way would be to simply
write a check for that amount — while not taking a deduction for
the “gift.” But it would be more creative for the Obamas to enhance
their tax liability. Since the law obviously doesn’t charge them
enough, they should come up with better numbers.
It’s hard for the president to bump up his salary without a W-2
to match. But he has plenty of other opportunities to inflate his
income. For instance, the Obamas declared just $3 (!) in dividend
income. This is an easy one. Make it $10,003 or $20,003. The IRS
wouldn’t mind. It certainly wouldn’t work to disprove that a
(relatively) rich family collected that much in dividends.
The Obamas also could toss in a few grand in alimony. True,
neither Barack nor Michelle Obama has a former spouse. But, again,
that shouldn’t bother America’s cash-strapped Treasury.
Claiming to receive Social Security or unemployment insurance
might be a bit awkward. However, the president could add some
amount for annuities. A big number, since no additional form or
documentation is required.
Inflating earnings is just one way for the Obamas to hike their
tax liability. They also could do more to pay their fair share by
reducing claimed deductions and credits. For instance, they list
$5,911 for half of the self-employment tax paid and $49,000 for a
retirement (SEP) contribution. Social Security is effectively
bankrupt and the Obamas won’t have any trouble making money after
the president leaves office. They should have left off these
deductions. A matter of social justice and all that.
The real money-maker, however, would be to stop claiming
itemized deductions. The Obamas subtracted a sizable $278,498.
Sure, doing so might be legal. But is it moral? Think of all the
vital revenue they are denying Uncle Sam!
The Obamas could make sure that they paid their fair share —
and simultaneously demonstrate that they are in tune with “real”
people, who don’t enjoy lavish, tax-preferred write-offs — by
taking the standard deduction, which would be $11,600 for the
couple. Knocking $266,898 off their write-offs would let the Obamas
pass the “Buffett Rule.” Problem solved!
But if that wasn’t enough, they also could forget the $5,841 in
foreign tax credits claimed. Heck, why shouldn’t the Obamas
simultaneously support Uncle Sam and a foreign government or two?
States overseas need love (and money) too. It’s a matter of
fairness worldwide.
The Bidens should do the same. Vice President Joe Biden
declared: “We’re not supposed to have a system with one set of
rules for the wealthy and one set of rules for everyone else.” Yet
they made a nice $379,035 last year. (Since the Bidens made no
income adjustments, their gross income is the same as their
adjusted gross income.) That’s not uber-rich, but I wouldn’t turn
down the extra cash.
On those earnings they paid $87,663 in federal taxes. Granted,
they aren’t making a million, and they are paying a slightly higher
rate than the Obamas — about 23 percent. However, they also fall
substantially short of the magic 30 percent. Whatever happened to
paying a higher rate than your secretary?
The Bidens should follow the same strategy as the Obamas. Write
a check for $26,048 to get over the 30 percent threshold. Or toss
in some extra income. The Bidens list no dividends, for instance.
What an exciting opportunity for creative accounting! Then there
are those empty lines for annuities and alimony on their tax
return.
Moreover, the Bidens claimed $60,628 in itemized deductions.
Simply listing the standard $11,600 would run up their tax
liability. Think of how much money the federal government would
“save.”
Yet when this idea was broached with the White House, Jay Carney
said “Well, we disagree.” He dismissed the proposal: “Another real
classy charge is the idea that, well, wealthy Americans who feel
like paying their fair share, feel like paying taxes at a rate that
middle-class Americans do — if they don’t, they have the option of
doing it themselves by writing a check.” Well, rich Americans like
the Obamas and Bidens do have that option. If the government won’t
make them pay more and they view doing so as a moral duty, then why
not ask them to contribute voluntarily?
Argued Carney: “Think what that says to middle-class American
families who are trying to get by, who are paying their taxes and
paying at a rate higher than Warren Buffett.” Actually, it would
say to them that rich people like Buffett and the president who
don’t believe they are paying enough are willing to put their money
where there mouths are. Step up, do your duty, and write a
check.
America’s tax system is a mess. Taxes should be used to raise
revenue, not manipulate behavior. Rates should be lower; filing
should be simpler.
We can argue about what constitutes “fairness” and how much the
“rich” should pay. But those arguing for the “Buffett Rule” have an
obligation to walk the talk. It’s bad enough for a really rich guy
like Warren Buffett to claim he should be paying more — and do
nothing. It’s far worse when someone, like the president, tries to
take political advantage of the issue and then does
nothing.
If President Obama hopes to win votes by posing as a defender of
the middle class, he should make sure that he pays a higher tax
rate than the middle class. Write the check, Mr. President!
