Obama's Recipe for Tax Disaster
President Obama's "Buffett Tax" proposal to change the nation's tax laws may sound seductively reasonable. Ensuring that nobody earning over a million dollars a year pays a lower percentage than the middle class sounds like justice. The truth, however, is that -- no matter how well-packaged it may be -- Obama's proposal is a nasty bit of class warfare that will destroy jobs, drive investment out of the economy, and harm the middle class, and it is certain to raise far less revenue than predicted.
Let's begin our discussion of this with the last part. Those, such as Warren Buffett, who feign outrage at the idea that a handful of extremely productive citizens might pay a lower percentage of their income in taxes than those with other kinds of income are being intentionally dishonest. They know full well that the reason why this occurs it that the sort of income being earned by these individuals consists largely of money that is realized in forms other than ordinary wage income, such as capital gains. Income of this sort is deliberately treated differently from how other kinds of income are treated because it accumulates over time, and is realized all at once. And for decades, inflation has been causing illusory capital gains to be reported.
Obama's proposal would amount to a massive increase in taxes on capital gains and other similar sources of income. People whose income comes in this fashion tend to have a very high degree of control over how and when they get paid. Does anyone think that such a massive change in taxation would not be accompanied by a corresponding change in behavior? Because most individuals with incomes in this range have the resources to engage in all sorts of behavior for the purpose of tax avoidance, it seems likely that a tax of this nature would raise far less revenue than any initial predictions would suggest.
Republicans need to absolutely home in on this point. It's bad enough to have a tax that's unfair and economically destructive. It's altogether another level of terrible to pass a tax that is both of those things and which doesn't bring in very much money
This is not an issue of seeking to protect our friends. I -- and I think I speak for many other conservatives in saying this -- oppose increasing taxes on the "rich" not because I have any great affection for most of them. I oppose it because all of the evidence that we have suggests that it won't work, that it will hurt the economy, and that any measures passed to target the "rich" today will come to haunt the middle class tomorrow.
It is important, in this context, to remind the general public of two things. First, almost all taxes that initially target only the "rich" -- the original income tax immediately comes to mind -- typically trickle down to target the middle class. This will especially prove to be the case for a tax, such as this one, where the facts on the ground make it likely to bring in far less money than initially estimated. Second, one doesn't even need to look as far back as the introduction of the income tax to see how this will go wrong: there's already a tax of this exact nature on the books called the Alternative Minimum Tax. Plenty of middle-class Americans already know how the AMT, also a tax passed to target supposedly tax-avoiding millionaires, has come to attack them. The Congress knows this as well, given that they have to annually pass "patches" onto the AMT to keep it from harming most of the middle class.
The sort of tax-avoiding behavior that these measures would incentivize are just about the worst thing that could happen to a fragile economy. Investors and other millionaires would defer income whenever possible, leaving money in already swollen corporate coffers and keeping it out of general circulation. We often underestimate the distorting effects that high taxes have on the economy and society as a whole. To pick just a single example, the strange state of American health care and the unique American reliance on private health insurance is a quirk that came to be as a result of extremely high taxes during the Second World War, when employers sought to hire away workers by offering tax-deductible health insurance to potential employees in lieu of other forms of compensation.
"The suspension of one man's dividends," Calvin Coolidge once reminded us, "means the suspension of another man's pay envelope." It is hard to think of anything that the government could do to better illustrate that essential truth than making it less attractive for the wealthy to dynamically invest their money.
There is one other point to consider. We are in the preliminary stages of one of the greatest public policy battles in our history. The government has current obligations that far exceed its ability to pay. In the coming years we will find ourselves with a choice: we can either pay, or we can reject as odious the promises made on our behalf by past generations. If we give in now, to this supposedly "reasonable" demand, we will simply have set the stage for the showdown over the next demand, and then for the one after that.
What we must do instead is stand firm in support of the policy that we know to be both best for the economy and morally right. It is morally wrong when laws are written to do special favors for a single individual or group. As conservatives, we believe in equality before the law and, just as it is wrong that the law should treat anyone with special favoritism, it is equally wrong to write laws that target a specific group for special mistreatment. The solution to a tax code full of easily exploited loopholes is not to target any single group for attack through addition to the code; it is to rewrite the code from the ground up in order to ensure equitable treatment for all.