The Obama Watch

Write a Check, Mr. President

Barack Obama fails the "Buffett Rule," depriving his government of vital revenue.

By 4.25.12

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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!

 

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About the Author
Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).