Special Report

Should We Raise Taxes on the Rich?

None of this makes any economic and moral sense -- unless one is as ideologically blind as our re-elected president.

By 11.14.12

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Barack Obama says that now that he has been re-elected, that means a majority of Americans agree with him that taxes should be raised on "the rich," so that they would pay their "fair share." But that policy makes no sense from any reasoned perspective.

Obama's Tax Increases, Your Unemployment
On January 1, the tax increases of Obamacare become effective, and the Bush tax cuts expire, which President Obama refuses to renew for the nation's job creators, investors, and successful small businesses (the plain English translation of "the rich"). That means the top tax rates of nearly every major federal tax will soar.

The top two income tax rates will jump by nearly 20%, the capital gains tax rate will skyrocket by nearly 60%, the tax on dividends will triple, the Medicare payroll tax rate will skyrocket by 62% for these disfavored taxpayers, and the death tax will rise from the grave with a 57% rate increase. These are not proposals. They have already been enacted into current law.

This is all on top of the U.S. corporate income tax rate, which at nearly 40% on average, counting state corporate taxes, is already the highest in the world under Obama, except for the socialist, one party state of Cameroon. Even Communist China has a 25% corporate rate. The average in the social welfare states of the European Union is less than that now. In Canada, which has been booming since Obama became President, the federal corporate rate is 15%, compared to 35% in the U.S.

In the global economy, America's businesses are uncompetitive with this enormous tax disadvantage. But under President Obama, there is no relief in sight. Instead, Obama spent his first four years barnstorming the country continuing to call for still more tax increases. Now Obama is already talking about a new carbon tax. So much for all his promises of no tax increase on the middle class "in any form."

Obama says that his tax increases would not affect 97% of all small businesses. But that top 3% of small businesses earn 91% of all small business income, and employ 54% of the total private sector U.S. workforce, as reported in Investor's Business Daily on November 9.

Obama's economic plan as of today is to continue the policies of the first term, except to add these comprehensive tax rate increases. Obama's policies have already produced the worst economic recovery from a recession since the Great Depression. Adding these comprehensive rate increases will only mean further downturn, sharply slashing the incentives for productive activity by reducing what producers can keep out of what they produce. The result will be less productive activity, particularly the savings and investment that are essential to creating jobs and increasing productivity and wages and incomes.

With the economy barely growing at all, the further enormous drag on the economy from all these rate increases will only tip it all back into recession. I started writing about that a year ago, especially in my short Broadside book published by Encounter, Obama and the Crash of 2013. But now even the Washington establishment is coming around to the same view, especially the Congressional Budget Office. Adding to the contractionary forces are Obama's explosive second term regulatory costs and restrictions, which in particular will burden the economy with crippling energy costs, and the Fed's wild monetary policies laying the groundwork for renewed inflation and recession.

Renewed recession will mean unemployment soaring back into double digits, the deficit exploding to over $2 trillion, shattering all world records, and exploding federal debt accelerating America on the expressway to Greece. This will only hurt the middle class, working people and the poor the most. The rich can live off of what they have, and liberate their money by investing it overseas.

What Is Fair About That?
But aren't these tax increases necessary to make sure the rich pay their fair share? Shouldn't they pay the same tax rates as everyone else?

The CBO reports the latest compiled data from the IRS. In 2009, the top 1% of income earners paid 39% of all federal income taxes, three times their share of income at 13%. In 1981 when President Reagan entered office, the top 1% paid just 17.6% of federal income taxes. So after nearly 30 years of Reagan Republican tax policies cutting income tax rates, by 2009 the share of federal income taxes paid by the top 1% had more than doubled. That resulted because at the lower rates, the rich took their money out of tax shelters and invested it, contributing to the economic boom, and reporting higher incomes earned as a result. This is why Jack Kemp always used to say, if you want to soak the rich, cut tax rates.

Also in 2009, the top 20% of income earners, those earning more than $74,000, paid 94% of federal individual income taxes, 85% more than the share of national income they earned. Yet, the middle 20% of income earners, which can be considered the true middle class, paid 2.7% of total federal individual income taxes on net that year, while earning 15% of before-tax income. And the bottom 40% of income earners, instead of paying some income taxes to support the federal government, were paid cash by the IRS equal to 10% of federal individual income taxes on net. That also was primarily the result of Reagan Republican tax policy over nearly 30 years, cutting taxes on the middle class, what the liberal/left calls the working class, and the poor.

So the only reasonable conclusion that can be drawn is that the rich actually pay far more than their fair share of federal income taxes. Is President Obama ignorant of these indisputable facts, or is he trying to deceive us to achieve his left-wing extremist goals?

President Obama is proposing increases in federal income tax rates to make the rich pay their fair share, so it is proper to look at what share of total federal income taxes are paid by different income earners. But even if we look at all federal taxes, and not just income taxes, the story is not very different.

In 2009, the top 1% paid over 22% of all federal taxes, again while earning 13% of the income, again according to official IRS data, as reported by CBO. Moreover, because of the weak economy, that is down under President Obama from the nearly 27% of all federal taxes paid by the top 1% that resulted from booming Reaganomics by 2007.

In addition, in 2009 the top 20% paid nearly 70% of all federal taxes, while earning 50% of the income. The middle 20% of income earners, again the true middle class, paid 9% of federal taxes, which was about two-thirds of their share of income at 15%. That means the top 1% alone that year paid way over twice the share of total federal taxes, at 22%, as the entire middle class, at 9%. Finally, the bottom 20% paid 0.3% of all federal taxes.

So, again, the only reasonable conclusion that can be drawn is that the rich pay more than their fair share of all federal taxes as well, according to official U.S. government sources. The President surely knows what official government data says. So he appears to be trying to deceive a majority of Americans to achieve radical, extremist, far left goals that he knows Americans will not support if they know the truth. Read his own books and autobiographies to see what those radical, far left views are. Or you can check out the book, The Communist, by Paul Kengor.

But shouldn't the rich be paying the same tax rates as the middle class? Shouldn't billionaires pay the same tax rates as their secretaries? Isn't that only fair?

Yes, it is. That is why leaders like Steve Forbes, Dick Armey and Steve Moore have proposed a flat tax, where everyone pays the same tax rate. That is the most fair tax system. Under a pure flat tax, if Steve Forbes earns 20 times what Dick Armey does, then he would pay 20 times the tax. But President Obama staunchly opposes a flat tax.

The rich already pay more at higher tax rates than everyone else, again according to official IRS data, as reported by CBO. In 2009, the top 1% paid an average federal tax rate of 29%, the middle 20% paid an average federal tax rate of 11.1%, and the bottom 20% paid an average federal tax rate of 1%. Obama and the Democrats are not being honest about the U.S. tax code, which is already the most progressive in the world.

President Obama, we don't need you to make the tax code fair. President Reagan already did that. Mr. President, you need to ask yourself what is fair about double digit unemployment, record shattering $2 trillion deficits, galloping national debt that threatens us with the same national bankruptcy as Greece, declining middle class wages and incomes, and more Americans in poverty than at any time in the past 50 plus years, according to official U.S. government data reported by the Census Bureau.

Higher Taxes and Less Revenue
But don't we need the revenue to balance the budget? And can't the rich afford that better than the middle class?

In the exit polls of the last election, when voters were asked "Should taxes be raised to help cut the budget deficit?" 63% answered no, to 33% who answered yes. That was the right answer, because the budget cannot be balanced by raising taxes.

CBO estimates, based on static analysis and not considering the negative economic effects, that all of President Obama's tax increases on couples making over $250,000 a year, and singles making over $200,000, would raise just $34 billion a year, or just 3% of the $1.1 trillion deficit, as Larry Kudlow comments in Investor's Business Daily on November 9.

But that is surely an overestimate of the resulting revenues. Over the last 45 years, every time the capital gains tax has been raised, capital gains revenues have declined rather than increased.

The capital gains tax rate was raised 4 times from 1968 to 1975, from 25% to 35%. The 25% rate produced real capital gains revenues in 1968 of $40.6 billion in 2000 dollars. By 1975, at the higher rate, capital gains revenues totaled $19.6 billion in constant 2000 dollars, less than half as much.

After the capital gains rate was cut from 35% to 20% from 1978 to 1981, capital gains revenues had tripled by 1986 compared 1978. Then the capital gains rate was raised by 40% in 1987 to 28%. By 1991, capital gains revenues had plummeted to $34.4 billion, down from $92.9 billion in 1986, in constant 2000 dollars adjusted for inflation. Obama's capital gains tax increase next year will reduce capital gains revenues again as well.

Similarly, when President Bush slashed the income tax on corporate dividends, dividends paid soared, and revenues from that dividends tax skyrocketed as well. With Obama's tax on dividends reversing the Bush tax cut, those revenue gains will be reversed as well.

And if the comprehensive tax rate increases push the entire economy back into recession next year, as argued above, federal revenues overall will decline rather increase, increasing rather than reducing the federal deficit and debt.

What is fair about that? Higher taxes, but with lower rather than higher revenues. As I said at the outset, none of this makes any sense. 

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.