As the president’s new tax plan looms on the horizon, the fallout from the notion of a minimum tax rate for millionaires has begun. While Democrats begin to use words like “equality” and “fairness” in taxation, Republicans have begun referring to the plan as “class warfare” as the plan proposes $1.5 trillion in tax hikes.
Spurred by billionaire Warren Buffett’s claims in an August New York Times article that government “coddles” billionaires, (the plan is called the “Buffett Rule”) Obama’s proposal seeks to increase taxes from the “low” rates to which Buffet alludes:
Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
Buffett then urges for a subsequent increase for those making more than $ 1 million. Though arguably noble in intent, it is crucial to understand the impact that such a policy would have; would increased taxes for the wealthy truly be economically beneficial in the long run?
As Alan Reynolds points out in Investor’s Business Daily, the 17.4 percent rate that Buffett uses (and Obama cited in his September 8 address to congress) is representative of the “coddling” that the rich enjoy. Not true. If your income is completely derived from realized capital gains of dividends, your income tax will be 15%; such an amount is not reserved for the wealthy.
Additionally, before the 15% is even paid, corporate gains and dividend taxes apply to corporate income. The federal corporate income lays on an additional 35% (one of the highest rates in the world). And despite Buffett’s arguments that America’s wealthy aren’t shouldering enough of the burden, the Tax Foundation’s review points at the top 1 percent of taxpayers paying 40.4 percent of the total federal income tax collected.
Reuter’s James Pethokoukis puts these numbers in perspective:
…The top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.
Indeed, Buffett misrepresents himself, as Reynolds points out. He is able to pay so little in payroll tax because his salary is only $100,000. He’s avoided the estate tax through his donations to the Gates Foundation, and reduces his taxable income through charitable donations and the like, thus his references to “taxable income” rather than “adjusted gross income.”
Furthermore, the income that Obama hopes to generate through the “Buffett Rule” would be negligible in the larger picture. As Jeffrey Miron points out on CNN:
In 2009, the income earned by the 236,833 taxpayers with more than $1 million in adjusted gross income was about $727 billion. Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue — only about 2% of federal spending. And $73 billion is optimistic; the super-rich will avoid or evade much of the surcharge, significantly lowering its yield.
Miron’s estimate at $73 billion is extremely generous; assuming America’s rich have exercised some degree of financial prowess to achieve their wealth, it is safe to assume that most will use Buffett’s tactics and reduce their taxable income even further. But beyond the diminutive returns for such a polarizing plan, there is a significant ideological impact that must be considered; discouraging the American dream.
How many young industrialists have been spurred on by tales of Horatio Algers, envisioning themselves achieving material greatness in a society that allows for such upward financial mobility? Modern-day Andrew Carnegies should not be preyed upon and demonized because of their wealth or the unscrupulous actions of others of affluence.
The creation of wealth should be incentivized, not punished; such castigation of entrepreneurial risk will only lead to economic ruin. Indeed, a critical flaw in demand-side economics is that supply and demand are mutually exclusive. Rather, supply is needed to create demand. Yet, the wealthy, creators of supply, face punishment upon doing so. What are needed are policies that address the root of the problem.
The “Buffett Rule” is a misguided attempt to fix problems that can only be solved through a complete retooling of the tax system. Capital income tax rates should be minimally taxed, and income, dividends and capital gains should not be subject to taxes, thus promoting stability, investment, savings and growth.
Indeed, the president’s proposal is reminiscent of the Bush Administration’s 1990 luxury tax, in which “amenities” such as certain types of alcohol, tobacco, automobiles and yachts were subject to increased taxation. The measure backfired; as the demand for said products declined, those who worked to produce such products lost their jobs and added to the economic problems of the time, until the tax was repealed two years later.
Once subjected to the “Buffett Rule,” America’s rich may very well adapt. But the chance that such taxes will hinder investment and restrict innovation as they did in 1990 is too great of a risk for the nominal revenue such a policy would generate.
Fundamentally, instituting a higher capital gains tax is easier said than done. As Reynolds succinctly observes,
Hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses. The evidence is undeniable that affluent investors and property owners report far fewer gains whenever the capital gains tax goes up. Choosing to pay tax on capital gains and dividends is usually voluntary, and when the rate gets too high we run short of volunteers.
Rather, government should look to long term solutions like limiting taxes and doing away with excessive licensing fees, environmental restrictions, and other regulations that hinder economic growth and deter investment.