Last week, President Obama reversed course once again and now wants to raise taxes on the “rich” making above $250,000 per year. Obama is in dire need of additional revenue after proposing a $3.8 trillion 2011 budget — containing the largest deficit in U.S. history at an estimated $1.6 trillion. Yet his latest share-the-wealth proposals make little sense.
Obama never distinguishes between the super-rich and the well-off. At one point, the president scoffed, “I don’t need another tax cut; Warren Buffett doesn’t need another tax cut.”
But Warren Buffett, unlike the building contractor or family dentist, is the world’s third-richest man, worth nearly $50 billion. And Obama is probably the most privileged person on the planet, with all of his expenses covered — from a nice free mansion at 1600 Pennsylvania Avenue to a huge private jet.
The rich and the poor are not separated across an impenetrable barrier. The president’s $250,000 line in the sand is actually quite fluid. Most of those who make incomes above it did not do so ten years ago — and they won’t, on average, 10 years hence. The income of well-off professionals and small-business people fluctuates widely as they ascend, peak, and descend in earnings — given factors such as health, age, and uncertainty in employment and business. It would be more accurate to say that raising taxes on the better-off is a sort of punishment for those who break into the top brackets for a few short years and try to be careful to save what they make and not spend what they don’t.
The super-rich pay in taxes a far smaller percentage of their income than do the well-off. An array of blue-chip tax lawyers and Byzantine write-offs — and paying at the capital-gains-tax rates rather than the income-tax rates — allows the Buffetts of the world to praise higher taxes while they connive to pay lower rates than most others. The IRS, for example, reported that the 400 richest Americans paid only 17 percent in federal income tax. A corporation like General Electric — run by Obama pal Jeffrey Immelt — paid no income taxes at all on its $14.2 billion in worldwide profits.
Nearly half of American households pay absolutely nothing in federal income tax. For them, the once-dreaded April 15 tax day is more a welcome time of tax credits, rebates, and refunds. In February 2011, American households received more than $2.3 trillion in direct government support, more than was collected during those 28 days by the Treasury in personal taxes. In contrast, the now-demonized top 5 percent account for almost 60 percent of all federal income-tax revenue — a higher percentage than anywhere else in the Western world.
Until recently, falling revenue has not been the prime cause of these serial national deficits. In fact, the Treasury took in an all-time high of nearly $2.6 trillion in 2007. Unfortunately, wild spending has skyrocketed well above the pace of both inflation and annual revenue increases. Such profligacy ensures that even with a growing economy, increased tax revenues never match out-of-control spending.
If the president wishes to raise revenue, he might first close loopholes. That would ensure that those who owe taxes actually pay them. He could start with his own Cabinet. Treasury secretary Timothy Geithner, who oversees the IRS, at one point did not pay his Social Security and Medicare taxes and took improper writes-offs. Attorney General Eric Holder, the nation’s top law-enforcement official, did not pay long-overdue property taxes on a house he co-owned until recently chided to do so by the media. The husband of Labor secretary Hilda Solis had overdue tax liens on property that went back 16 years. Cabinet nominee Tom Daschle withdrew from consideration due to past unpaid taxes.
So before raising taxes, the president might first urge the super-rich to pay their taxes at the income-tax, rather than the capital-gains-tax, rate. Next, he could remind his own Cabinet officers to pay all the taxes they owe. Then, he should offer to pay more of the first family’s costs when they jet to luxury spots such as Martha’s Vineyard, Costa del Sol, or Vail. And finally, he might ask the nearly 50 percent of Americans who now pay no income tax to pay at least 5 percent of their income in federal taxes — to ensure that they see their government as a taker as well as a giver.
Do all that and we would have more money — and the president would be less likely to declare, “I don’t need another tax cut.”
— Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and the author, most recently, of The Father of Us All: War and History, Ancient and Modern. © 2011 Tribune Media Services, Inc.