Obama's Debt-Solving Plan: Tax the Rich, Not the Rest

In the his recent State of the Union address, the president took another swing at the country's top income-earners -- also a theme of last year's address.  Embracing the populism of the Occupy movement and their disdain for the top 1% of income-earners, the president returned to scorning the successful and blaming them for income disparity.

We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.

Income -- that is to say, very high income -- has become a charged topic even during the Republican presidential debates.  Mitt Romney's recent release of his tax returns has added new fuel to the class warfare fire.  What Mr. Romney's detractors, including the president and Newt Gingrich, insinuate is that he came to his wealth by breaking the rules.

The rub -- according to the president and others -- is that Romney paid only $3M in federal taxes.  Three million sounds like a lot, so for the president and Occupy, it is rather self-serving to say that Romney's income tax rate was 14%, or about $3M on $20M of income.  This rate is far less than the top income tax bracket of 35% and far less than many lower-income-earners pay, leaving many confused.

To this point, the president said:

Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. Right now, Warren Buffett pays a lower tax rate than his secretary.

We should note that the loophole the president clamors about is really a benefit to all Americans with an investment account.  America has the highest corporate tax rate in the world -- 35% -- on earnings, but any gains paid to shareholders are accessed via another tax at the personal level.  To mitigate the double-taxation, the Bush tax cuts lowered the tax on investment gains to a maximum of 15%.  Before 2003, a corporation might pay up to 35% on profits, and the investor might pay up to 35% in income taxes, for a total tax of 58%.

The Occupy movement and the president either don't realize or purposely neglect to mention that our country has one of the most level economic playing fields of any country that has ever been.  Most who have wealth in our country got it the old-fashioned way: they earned it.  The president proposes that the rich have gotten richer while everyone else has gotten poorer and that the rich have gotten richer at the expense of everybody else.  In a free-market society like ours, Steve Jobs got rich by developing great products that we all benefit from and that we all chose to purchase freely -- not by stealing.

It is an economic truism that wealth trickles down.  Despite what the president and the New York Times say, in real terms (adjusted for inflation), the middle class increased their income and spending by 50% over the last three decades.  In the last decade alone, the gap between the rich and the middle class actually shrank, and income growth was greater for the middle class than was the income growth rate of the rich.

With sterling delivery and broad smile, the president continued:

We don't begrudge financial success in this country. We admire it. When Americans talk about folks like me paying my fair share of taxes, it's not because they envy the rich. It's because they understand that when I get a tax break I don't need and the country can't afford, it either adds to the deficit, or somebody else has to make up the difference -- like a senior on a fixed income, or a student trying to get through school, or a family trying to make ends meet. That's not right. Americans know that's not right. They know that this generation's success is only possible because past generations felt a responsibility to each other, and to the future of their country, and they know our way of life will only endure if we feel that same sense of shared responsibility. That's how we'll reduce our deficit. That's an America built to last.

This statement is so misguided that it's upsetting.  The president says that tax breaks add to the deficit -- in fact, only government spending can add to the deficit -- and that the only way we can reduce our deficit is by giving the government even more responsibility for its citizens and by increasing taxes on the rich.  The president is proposing that by increasing the taxes on the top income-earners, he can balance the budget.  This line of reasoning is plain fallacy; if every American paid twice the federal income taxes in 2011, there would still be a $207-billion spending deficit.  A 100% tax on the top 5% of income-earners wouldn't solve the problem either.

What no one seems to mention is the astounding increase over the last thirty years in what the top ten percent of income-earners already pay in income taxes -- matched only by the stunning decrease in the percent that the bottom half of income-earners pay.  To be in the top ten percent of income-earners requires an income of $114K.

The greatest trick the government ever pulled was convincing voters that they could eternally reap free government subsidies without paying for them.  The president, the left, and at times the right suggest that our tax system is broken because the rich don't pay enough tax.  These silver-tongued demagogues have purchased votes by perpetuating this lie while tax rate disparity was increasing to the greatest difference in modern times.

What the president is really proposing is to use tax law to further promote income tax disparity and give more to the bottom fifty percent.  The chart below shows the frightening increase in the number or tax-filers who paid $0 of income tax.  To be clear, 76 million Americans paid absolutely no income tax -- or actually paid a negative rate, meaning they received money.  This is double the amount of such Americans (in real terms) in 1976. 

The president is right that we have an unfair tax code through which certain members don't pay their fair share.  The growth of wealth distribution through the tax code is frightening.  The real problem is that both Republicans and Democrats are endeavoring to buy votes by increasing the number of Americans who don't pay taxes while blaming those who do.

Instead, there ought to be broader support of a tax system where our neighbors aren't forced to pay a higher, progressive tax simply because they earn more.  Class warfare is the vilification of one group of people over another.  In other parts of the world where people are born to position, class warfare has a place -- but in America, the huge majority plays under the same fair rules.  Or at least it should.

Brenton Stransky is a co-author of The Young Conservative's Field Guide and can be contacted through his website, www.aHardRight.com.

In the his recent State of the Union address, the president took another swing at the country's top income-earners -- also a theme of last year's address.  Embracing the populism of the Occupy movement and their disdain for the top 1% of income-earners, the president returned to scorning the successful and blaming them for income disparity.

We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.

Income -- that is to say, very high income -- has become a charged topic even during the Republican presidential debates.  Mitt Romney's recent release of his tax returns has added new fuel to the class warfare fire.  What Mr. Romney's detractors, including the president and Newt Gingrich, insinuate is that he came to his wealth by breaking the rules.

The rub -- according to the president and others -- is that Romney paid only $3M in federal taxes.  Three million sounds like a lot, so for the president and Occupy, it is rather self-serving to say that Romney's income tax rate was 14%, or about $3M on $20M of income.  This rate is far less than the top income tax bracket of 35% and far less than many lower-income-earners pay, leaving many confused.

To this point, the president said:

Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. Right now, Warren Buffett pays a lower tax rate than his secretary.

We should note that the loophole the president clamors about is really a benefit to all Americans with an investment account.  America has the highest corporate tax rate in the world -- 35% -- on earnings, but any gains paid to shareholders are accessed via another tax at the personal level.  To mitigate the double-taxation, the Bush tax cuts lowered the tax on investment gains to a maximum of 15%.  Before 2003, a corporation might pay up to 35% on profits, and the investor might pay up to 35% in income taxes, for a total tax of 58%.

The Occupy movement and the president either don't realize or purposely neglect to mention that our country has one of the most level economic playing fields of any country that has ever been.  Most who have wealth in our country got it the old-fashioned way: they earned it.  The president proposes that the rich have gotten richer while everyone else has gotten poorer and that the rich have gotten richer at the expense of everybody else.  In a free-market society like ours, Steve Jobs got rich by developing great products that we all benefit from and that we all chose to purchase freely -- not by stealing.

It is an economic truism that wealth trickles down.  Despite what the president and the New York Times say, in real terms (adjusted for inflation), the middle class increased their income and spending by 50% over the last three decades.  In the last decade alone, the gap between the rich and the middle class actually shrank, and income growth was greater for the middle class than was the income growth rate of the rich.

With sterling delivery and broad smile, the president continued:

We don't begrudge financial success in this country. We admire it. When Americans talk about folks like me paying my fair share of taxes, it's not because they envy the rich. It's because they understand that when I get a tax break I don't need and the country can't afford, it either adds to the deficit, or somebody else has to make up the difference -- like a senior on a fixed income, or a student trying to get through school, or a family trying to make ends meet. That's not right. Americans know that's not right. They know that this generation's success is only possible because past generations felt a responsibility to each other, and to the future of their country, and they know our way of life will only endure if we feel that same sense of shared responsibility. That's how we'll reduce our deficit. That's an America built to last.

This statement is so misguided that it's upsetting.  The president says that tax breaks add to the deficit -- in fact, only government spending can add to the deficit -- and that the only way we can reduce our deficit is by giving the government even more responsibility for its citizens and by increasing taxes on the rich.  The president is proposing that by increasing the taxes on the top income-earners, he can balance the budget.  This line of reasoning is plain fallacy; if every American paid twice the federal income taxes in 2011, there would still be a $207-billion spending deficit.  A 100% tax on the top 5% of income-earners wouldn't solve the problem either.

What no one seems to mention is the astounding increase over the last thirty years in what the top ten percent of income-earners already pay in income taxes -- matched only by the stunning decrease in the percent that the bottom half of income-earners pay.  To be in the top ten percent of income-earners requires an income of $114K.

The greatest trick the government ever pulled was convincing voters that they could eternally reap free government subsidies without paying for them.  The president, the left, and at times the right suggest that our tax system is broken because the rich don't pay enough tax.  These silver-tongued demagogues have purchased votes by perpetuating this lie while tax rate disparity was increasing to the greatest difference in modern times.

What the president is really proposing is to use tax law to further promote income tax disparity and give more to the bottom fifty percent.  The chart below shows the frightening increase in the number or tax-filers who paid $0 of income tax.  To be clear, 76 million Americans paid absolutely no income tax -- or actually paid a negative rate, meaning they received money.  This is double the amount of such Americans (in real terms) in 1976. 

The president is right that we have an unfair tax code through which certain members don't pay their fair share.  The growth of wealth distribution through the tax code is frightening.  The real problem is that both Republicans and Democrats are endeavoring to buy votes by increasing the number of Americans who don't pay taxes while blaming those who do.

Instead, there ought to be broader support of a tax system where our neighbors aren't forced to pay a higher, progressive tax simply because they earn more.  Class warfare is the vilification of one group of people over another.  In other parts of the world where people are born to position, class warfare has a place -- but in America, the huge majority plays under the same fair rules.  Or at least it should.

Brenton Stransky is a co-author of The Young Conservative's Field Guide and can be contacted through his website, www.aHardRight.com.