"We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules."
—President Barack Obama, State of the Union address, January 24, 2012
Democrats use the politics of envy and division
With 13 million Americans unemployed and millions more struggling to cope with the Obama economy, it’s clear that the president’s policies have failed and actually made things worse. As he cannot run on a record of accomplishment, the president has decided that rallying votes in a campaign of class warfare is more important than putting forward actual solutions and governing.
It’s no surprise, really, that when economic policies have failed as badly as those of the Obama Administration, cognitive dissonance compels the president and his allies in Congress to blame the free market system and, in doing so, zero in on what they deem a flaw in the tax code: the “rich” don’t pay enough taxes.
Now, considering that the Merriam-Webster Dictionary lists as a definition for the word fair: “marked by impartiality and honesty : free from self-interest, prejudice, or favoritism,” the president would seem to be comfortable with contradictions. If only the federal government could take more of what those anonymous “millionaires and billionaires” have, Democrats declare, the country would be a better place!
However, not only is this populist pitch illogical as actual policy given the scale of our fiscal problems, the narrative also betrays American values. And, oh by the way, it also happens to be intellectually misleading, at best.
The myth of the undertaxed wealthy person
Of Mr. Buffett and his secretary: It is apparent that President Obama believes channeling Warren Buffett’s frustration over his secretary’s tax returns makes for a good speech, but such rhetoric does nothing to illuminate the reality of average tax rates paid by different income groups.
As a recent Wall Street Journal editorial highlighted using the most recent IRS data: “[N]early all millionaires still paid a rate that is more than twice the 8.9% average rate paid by those earning between $50,000 and $100,000, and more than three times the 7.2% average rate paid by those earning less than $50,000.”
Need reinforcement? Turns out the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO) both report similar findings—high-income individuals do not on average pay lower tax rates than low- or middle-income earners—which the House Committee on Ways and Means has laid out in a useful comparison here.
Progressives seek to undo progress: Attempting to indict supply-side economic theories in favor of more government-directed redistribution of wealth, many Democrats claim that the tax reforms of the last 30 years have skewed the tax code in favor of the wealthy. Yet again, the claim is demonstrably false.
The CBO report mentioned above noted, “Taken as a whole, the federal tax system is progressive.” Going further, the report also found that “[comparing] shares of taxes with shares of income, the federal tax system as a whole was about as progressive in 2007 as it was in 1979.”
Of course, never bothering to let facts and sound policy get in the way of political objectives, Democrats find whipping up popular resentment of successful job creators easier than explaining how our tax code actually functions.
Capital gains games: Whenever a successful investor, job creator, or Republican presidential candidate is rhetorically burned in effigy for his allegedly low effective tax rate, the real victim is simple math. While it is often true that high-income individuals owe most of their income to returns on investments—which are taxed at the statutory 15 percent rate—most Introductory Business or Economics 101 students know that this is referred to as “double taxation.”
Those profits, first taxed at the company level, which the federal government currently sets at the internationally uncompetitive rate of 35 percent, are then taxed again at 15 percent as a capital gain or dividend to the investor. This results in an effective tax rate closer to 45 percent. But why get caught up in calculations when one can just sacrifice the general public’s understanding of taxation on the altar of a class warfare campaign?
Explaining why the capital gain tax rate is lower than the rate on wage income, economist Diana Furchtgott-Roth points out that the lower rate is designed “to encourage the risk-taking involved in investment. Investors supply the financial capital essential for investments that spur innovation, improve productivity, and expand capacity.” When capital works in this way, businesses grow and Americans find jobs.
Unfortunately, as 8 percent or higher unemployment for 35 consecutive months will attest, job growth has taken a backseat to the policies of the Obama administration.
Divide and conquer
While we can all agree with author P.J. O’Rourke’s characterization of free market capitalism as “the worst economic system anyone ever invented, except for all the others," Democrats refuse to accept that we are in a spending-driven debt crisis that cannot be solved with tax increases on our nation’s job creators. Instead, they continue to complain about the fairness of the tax code and our economy in general.
Ironically, a Gallup poll released this week indicates that “62% [of Americans] say the U.S. economic system is fair to them personally,” undercutting President Obama’s State of the Union calls for increased fairness. But campaign priorities know no bounds. The ugliest part of Democrats’ efforts to pit one group of Americans against another is the disloyalty to the American ideal of empowering those who work hard and play by the rules to earn success, not punishing them when they do.
What Democrats’ frustrations actually argue for are the policies House Republicans passed last year in the Path to Prosperity budget: scrapping the tax loopholes, ending the special interest taxpayer subsidies the president defends—like those he gave to Solyndra—and making the tax code flatter, simpler, and fairer. Also helpful would be for President Obama and Democrats in Congress to realize (modifying an idea of a prominent pastor) that it is impossible to legislate some people into prosperity by legislating others out of it.