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.
President Obama proposes to stop taxing investment income at lower rates than salaries and other cash income, and to raise tax rates generally on American families earning $250,000 or more. His approach is a deeply foolish one. For one thing, it probably would not raise the revenue he claims it would. Consider the example of Mr. Buffett, who already has shown himself shrewd when it comes to minimizing his taxes. If he has made a $1 million investment that increases in value to $2 million, he does not need to realize his capital gain on the investment: If he simply holds the investment, he has a $2 million asset. If he realizes the capital gain, he has a good deal less than that: $2 million minus the tax of 30-odd percent President Obama contemplates imposing. A man with many millions or billions of dollars in wealth need realize relatively few capital investments: He can sit on that money for a very long time, and so can his children and grandchildren. Just as Mr. Buffett pays himself only $100,000 a year, a man with a $10 million portfolio can easily realize only $249,999.99 in annual capital gains over several years, rather than cashing in the whole thing at once, to avoid the punitive taxes the president desires. Neither President Obama nor any act of Congress can force an investor to realize a capital gain at any given time.
Worse, this tax hike would immediately devalue the investments of millions of American households, and would make investing in American firms, which already labor under the developed world’s second-highest corporate-tax rate, even less attractive. It would do so precisely at the time when we should be encouraging investment, which is the only real source of reliable long-term job growth.
While we believe that a tax increase is bad medicine for a country on the cusp of a double-dip recession and suffering from the weakest growth and worst job market in modern history, practically all parties — Republicans and Democrats, supply-side conservatives and their tormenters at the Brookings Institution — agree that a deep and fundamental reorganization of the U.S. tax code is highly desirable, and there are several excellent proposals for doing so. President Obama’s preference for simply jacking up tax rates on families earning $250,000 and more is crude and childish in comparison with the proposals of thoughtful Democrats, to say nothing of those offered by more sensible conservatives.
Beyond his centerpiece tax hike, the president has packed his proposal with a mess of phony savings. Amusingly, the president has included “savings” from forgone Iraq and Afghanistan spending that was never going to happen in the first place — and then counted interest that was never going to be paid on the money that was never going to be borrowed for the spending that was never going to take place. Meanwhile, the main drivers of deficits going forward — Social Security, Medicare, and Medicaid — are almost entirely sheltered. That leaves us with a real tax increase to balance fictitious spending cuts.
It seems like ages ago that the charming young presidential candidate, suffering because of his association with the racist crackpot in whose church he worshiped for decades, responded with incredible chutzpah, delivering a sermon on racism to the American electorate. Now, after having forced through trillions upon trillions of dollars in new spending on failed stimulus programs, a gigantic new health-care entitlement, and ineffective tax-break measures for favored political constituencies, the president has the gall to denounce the “profligate spending in Washington.” Never mind that he’s been signing the bills. Even the hated “Bush tax cuts” — the tax rates that have been the law of the land for a decade, since Obama was an obscure state legislator — were extended by Obama’s own hand. It is not as though he didn’t have the authority to veto them if he thought them bad policy; it was only the courage he lacked. To that deficit add one of wisdom, or even elementary economic literacy, and an annual U.S. budget deficit continuing to top the $1 trillion mark for the foreseeable future — such is the lesson of Monday’s speech and the proposal proceeding from it. We did not have high hopes for Barack Obama as an economic thinker, but he continues to underperform our lowest expectations.