Misleading Political Theater

by John Hood

Warren Buffett’s secretary is reportedly sitting in the box with the First Lady tonight. Obviously, President Obama will repeat the utterly false claim that Warren Buffett bears a lower tax burden than his secretary does. If you understand the varying tax treatment of labor and capital income at the corporate level — the former being deductible from taxable income, the latter a part of taxable income — then you understand why Buffett’s claim is false. If you further understand how screwed up the tax calculation on phantom capital gains is, how taxing the principal of an investment already taxes its return, and how America’s corporate income tax came about in the first place (Congress enacted it as a substitute for individual income taxation, after the Supreme Court declared direct income taxes unconstitutional), then you understand that those who defend Buffett’s false claim about the undertaxed wealthy are either ignorant or dishonest.

The wealthy pay a significant higher share of their income in taxes than the middle class or the poor do. If you combine federal, state, and local taxes together and divide by income, the top quintile of U.S. households pay about twice as much in taxes as a share of their incomes as the bottom quintile does. Because government spending disproportionately benefits lower-income households, the progressivity of government’s fiscal structure is even more steep than the tax data alone would show.

If you want to defend this level of progressivity, fine. If you want to argue that the system ought to be even more punitive at higher income levels, go for it. But denying that the wealthy already pay a disproportionate share of taxes is an act of gross irresponsibility.

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