Pres. Barack Obama promised to have a plan to pay for his massive new stimulus bill by Monday. He broke that promise, as he has broken so many others, and remains in the “plan to have a plan” stage of his inscrutable meditations, having only made yet another unsubstantial speech, full of high sentiment and short on details. The president says he wants to ensure that the very wealthy do not pay lower effective tax rates than do the middle-class, and argues that families and businesses earning more than $250,000 in any given year should pay an additional $1,500,000,000,000.00 or so in taxes, but is mostly mum on how to get that done: “We’re not going to give the Congress a detailed proposal for how to meet that principle,” Treasury Secretary Timothy Geithner says. In other words: Don’t ask us! We’re just the president and the cabinet and the entire executive branch of the U.S. government!
President Obama keeps repeating the words “Pass This Bill” like a third-grader who has just mastered a new vocabulary word, but it is worth noting that, at the moment, there is only half a bill: the 155 pages of stimulus spending he calls the American Jobs Act. That second part — the part where this is all “paid for” — has not condensed from the vapor that surrounds the president. It’s just a speech, putting us once again in mind of the Congressional Budget Office’s declaration: “We don’t score speeches.”
So we have a statement of principles and a vague outline of a plan, which is enough to conclude that the principles are poisonous and the plan destructive.
Mr. Obama and his favorite campaign underwriter, billionaire investor Warren Buffett, have tried to bring in a bumper crop of political hay out of the fact that Mr. Buffett alleges that he pays taxes at a lower effective rate than does his secretary. There’s rather less to that than meets the eye: Mr. Buffett, the third-wealthiest man currently walking the earth, pays himself a salary of only $100,000 a year, and says his secretary earns around $60,000. (If his secretary has a spouse similarly employed, the couple may very well earn a combined salary higher than Mr. Buffett’s, as indeed do any number of police detectives and high-school principals.) Mr. Buffett pays no taxes on dividends accruing to the many shares of stock he holds in his company, Berkshire Hathaway, simply because the firm does not pay a dividend, while most of his personal wealth has been put into a trust. Each of those facts — the relatively low salary, the lack of dividend payments on Berkshire Hathaway shares, the trust — is part of a calculated strategy to avoid paying taxes. While we do begrudge Mr. Buffett his ridiculous moral posturing, we do not begrudge him the benefit of such allowances as the tax code affords: Mr. Buffett, after all, did not write the tax laws. And he shouldn’t start writing them now.
Very wealthy people such a Mr. Buffett tend to earn their money in one of three ways: as investors, as entrepreneurs, or as executives in large enterprises. In each case, salary is a relatively small part of total compensation: Rather than getting a regular paycheck, investors, entrepreneurs, and top executives most often are rewarded with an ownership stake in their firms. As they work to increase the value of the business, they enrich themselves as well. This is a desirable arrangement to the extent that it aligns the financial interests of a company’s management with those of its shareholders. Because Congress has for decades sought to increase the incentives for Americans to invest — investment being where new businesses, products, and jobs come from — we tax long-term capital gains at a lower rate than we tax regular income such as salaries and cash bonuses. This reflects both the fact that investors are risking their capital and the fact that much of the money that flows into such investments already has been taxed once — as household income in the case of Americans investing for their retirements, or as business income in the case of large and small firms expanding their operations and product lines with new investments.