It looks as though Barack Obama and the Democratic Party are going to make their central argument for the 2012 election that America should greatly increase the cost of capital to small and medium sized businesses that need such capital to expand and create jobs. Mitt Romney and the Republicans could hardly have asked for a better gift. I say "hardly" because it would be an even bigger gift if Obama and the Democrats decided to run on their "achievements" of the past 3+ years.
The Obama-Biden team (it's not quite apparent yet how many Democrats in the House and Senate will fall into line) are spinning the proposal at the top of their agenda that would effectively double the capital gains tax rate for those who do the most investing (the "Buffett Rule") as simply a matter of "tax fairness." Unsurprisingly, the mainstream press has uncritically accepted the official Obama election team line. David Jackson of USA Today is not alone among news reporters when he characterizes the "Buffett Rule" as "a requirement that millionaires pay at least the same tax rate as middle-class Americans." Initially, the Obama administration defined the average "middle-class American" as Warren Buffett's secretary who, it turns out, makes a salary of $200,000 or more. In this specific instance, Warren Buffett's claim that he paid a lower average effective rate than his secretary is likely true. But the claim that people like Buffett or Mitt Romney, who derive most of their income from capital gains (and who give a lot to charity), pay a lower average effective tax rate than do average Americans, is demonstrably false.
Under current law, long-term capital gains are taxed at 15%. The "Buffett Rule" would impose a minimum 30% federal income tax rate on all income from any source, and exclude most deductions, for people with incomes over $1,000,000. The liberal Center on Budget and Policy Priorities (which thinks that Americans are fundamentally undertaxed) puts the average effective income tax rate for the median income family of four at about 6%. This is also in line with data from the more conservative Tax Foundation, which has calculated the average effective tax rates by income bracket as of 2009 as follows:
Top 1%: 24.01%
Top 5%: 16.40%
From 5% – 10%: 11.40%
From 10% – 25%: 8.23%
From 25% – 50%: 5.58%
(Note that the average effective tax is federal income tax divided by income, and should not be confused with marginal tax rates, which is the tax paid on every additional dollar of income.)
The administration's own official calculation in the 2012 Economic Report of the President is similar, though some have quoted it as determining the average effective tax rate for the middle quintile of Americans (those making 40 to 60 percent of the national average) at 13.3%. That, however, is grossed up to include Social Security taxes, which are supposed to be recouped by the payer during retirement. But even Mitt Romney, the Obama administration's poster boy for the "unfairness" of the current system, paid an average income tax rate (without Social Security) of about 14% in 2010 and will pay about 15% in 2011.
The only group that really has a legitimate gripe about people like Warren Buffett and Mitt Romney paying a lower effective tax rate than they are would be the top 5% of income earners. (To qualify to be in the top 5% in 2009, your adjusted gross income had to be at least $154,600.) But if you're in the top 5%, guess what? The Obama administration wants to raise your income taxes, too.
So the "fairness" argument at the heart of Obama's reasoning for the need for the "Buffett Rule" is a lie. This being the case, most observers (outside of the mainstream media) will probably come to the conclusion that Obama's campaign is therefore merely using the same old cynical populist class warfare rhetoric that we've come to expect from liberal Democratic politicians in an election year. That is no doubt the case for many congressional Democrats who will be toeing the Obama line, and to a certain extent true of Obama himself. But in the case of Obama, there is another layer; he actually believes that taxing the rich more is, in and of itself, a good policy objective.
Never mind that the top 1% of taxpayers (earning about 16% of national income) pay almost 40% of federal income taxes. Never mind that the top 5% of taxpayers pay about 59% of federal income taxes. Never mind that the amount of money raised by the "Buffett Rule" would be inconsequential compared to the annual budget deficit. High-income groups should pay more because they have more and it is always "fair" to tax them more as long as they have more. Obama believes what he told "Joe the Plumber" in the 2008 campaign -- government needs to "spread the wealth around."
To understand Obama's thinking regarding "fairness" just take this line from his recent campaign swing through Florida: "the share of our national income going to the top 1% has climbed to levels we haven't seen since the 1920s." My issue here is not with the accuracy of the statement (I haven't checked it out). My issue is his implication that the top 1% has not earned their income, but rather, it is "going" to them. It is "fairness" that people are given things in equal measure, but it is not "fairness" that money earned by some people should be taken and given to those who didn't earn it. In Obama's worldview, high-income earners don't earn their income, it somehow just goes to them, and government should step in to even things out. He goes on to say, "The folks who have benefited from this are paying taxes at one of the lowest rates in 50 years." So, again, rich folks didn't actually do anything to earn their money, they just "benefited" from some cosmic alignment that threw more of the "national income" their way.
For the better part the of the last 90 years, Democrats and Republicans have found common ground in the belief that long-term capital gains should be taxed at a meaningfully lower rate than ordinary income because of the widespread recognition that encouraging people to put money at risk to expand the economy is a good thing. It creates jobs by increasing the availability capital, and lowering the price of that capital. Even past Democratic administrations, such as the Kennedy administration, pushed for lower rates on long-term capital gains. But aside from being more crassly political than most past administrations, the Obama administration is also far more driven by leftist ideology than its predecessors.
The "Buffett Rule" has nothing to do with fairness. It also has nothing to do with deficit reduction. It has everything to do with trying to "unite" the country by demonizing one small group of people, which non-coincidently includes the Republican presidential candidate. But it is more than just a cynical ploy; it is also a reminder of the Obama administration's ideological core. So with only ambiguous and unsupportable arguments about "fairness," just how will the Obama-Biden team answer counterattacks by the Romney campaign exposing its falsehoods and exposing the "Buffett Rule" as the jobs killer that it is? The Obama re-election team thinks it has a winning issue as, up until now, fed only by the Obama administration's "fairness" spin, a majority of Americans have voiced support for the "Buffett Rule." But the Obama team may get snared in the trap that it thinks it has laid for Romney. If Romney and the Republicans play offense on the issue, it will be Obama who is boxed in trying to defend why he supports stifling job creation merely for the sake of punishing Mitt Romney and a few thousand other successful capitalists.
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