The ‘Reagan Rule’? Not Quite

by Patrick Brennan

Today at the White House, President Obama made another speech to sell the “Buffett Rule,” which would establish a minimum overall tax rate, 30 percent, for Americans making more than $1 million a year. Perhaps disappointed by the support so far for his calls for “fairness,” he cited Ronald Reagan as a likely supporter, saying,

I’m not the first president to call for this idea that everybody has got to do their fair share.  Some years ago, one of my predecessors traveled across the country pushing for the same concept.  He gave a speech where he talked about a letter he had received from a wealthy executive who paid lower tax rates than his secretary, and wanted to come to Washington and tell Congress why that was wrong.  So this president gave another speech where he said it was “crazy” — that’s a quote — that certain tax loopholes make it possible for multimillionaires to pay nothing, while a bus driver was paying 10 percent of his salary. . . .

What Ronald Reagan was calling for then is the same thing that we’re calling for now:  a return to basic fairness and responsibility; everybody doing their part.  And if it will help convince folks in Congress to make the right choice, we could call it the Reagan Rule instead of the Buffett Rule.

Unfortunately, President Obama would likely have a very hard time convincing Ronald Reagan to apply his name to the Buffett Rule, despite their shared use of the word “fair.” President Reagan did indeed lament the loopholes that millionaires used to pay extremely low taxes while everyone experienced high marginal rates, but in order to solve it, rather than proposing the Buffett Rule, another wrinkle in the tax code and America’s second minimum tax, he suggested that the tax code be simplified.

#more#Further, Reagan’s tax reform emphasized simplicity, via eliminating tax deductions, and lower marginal rates — just two brackets, in fact, with the maximum one being 28 percent, lower than Obama’s proposed minimum rate (on those two broad principles, in fact, Paul Ryan’s plan, not Obama’s, resembles Reagan’s). Obama’s rule, on the other hand, is calling for significantly higher marginal rates on many taxpayers who make more than $1 million a year, making it very different from President Reagan’s proposal, under which they might have faced higher overall rates, but definitely lower marginal ones. (In fact, the most recent iteration of the Buffett Rule has overall minimum rates ramping up to 30 percent for taxpayers earning between $1 million and $2 million — avoiding an absurd tax cliff at $1 million, but creating, for some people, potentially very high marginal rates from which a supply-sider like Reagan would recoil.)

The Buffett Rule’s only possible similarity to Reagan’s policies is that it would, for some tax payers, practically speaking, tax capital gains and earned income at more similar rates than before. These rates were equalized at 28 percent under Reagan’s tax reforms, but over time, capital-gains rates have been cut, and earned-income rates have been raised, allowing some wealthy taxpayers who earn most of their income in capital gains to pay less than less wealthy citizens who earn it in salary.

But as today’s NR editorial points out, if President Obama would in fact like to eliminate this “loophole” treatment of investment income, he should admit that that’s what he’s doing, rather than veiling it with the idea of “fair” tax rates. He refuses to admit that this proposal is merely a back-door way to eliminate a preferential (but debatably justified) capital-gains treatment for arbitrarily chosen Americans.

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