Obama’s perilous assault on the rich
By Clive Crook
Published: May 1 2011 19:14
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When Barack Obama talks about fiscal control, the idea he emphasises – often the only one he offers with conviction – is raising taxes on the rich. This gets ovations from Democrats, thrilled that the US president has not sold out entirely. Equally constant is the Republican response: accusations of class warfare and economic vandalism. For all Mr Obama’s fine talk, says the Grand Old Party, Democrats fall back on their traditional job-killing cure-all.
The outlook for US public debt makes the Republican position on taxes – no increases, regardless – grossly irresponsible. Higher revenues will be needed to balance the books. The GOP’s political judgment is questionable too.
This president smiles too much to make a convincing class warrior, though you could not say the same of every Democrat.
Consider the economics first. US income tax rates are not far out of line with other countries’. George W. Bush, Mr Obama’s predecessor, cut the top rate on employment income from almost 40 per cent to 35 per cent, which the president wants to reverse.
However, add in state income taxes, the Medicare tax, the withdrawal of some tax exemptions as income rises and the interaction of the alternative minimum tax (don’t ask), and the highest marginal rates already spike at more than 50 per cent – before Mr Obama adds back the Bush cut.
The US income tax system is anomalous not because its rates are low but because, given its middling rates, it collects so little revenue. Between 2004 and 2008, US taxpayers surrendered, on average, a little over 12 per cent of their income in federal income tax. The bottom 50 per cent of households faced an average tax rate of roughly 3 per cent; the top 50 per cent an average tax of 14 per cent; the top 5 per cent a tax of 21 per cent; and the top 1 per cent a tax of 23 per cent. The system turns regressive for the very richest; the top 0.1 per cent of taxpayers (incomes starting at between $1.5m and $2.2m) faced a slightly lower average tax rate than the merely rich.
There are two main reasons for the gap between average and marginal rates. The first, in the middle of the income distribution, is the value of tax deductions for mortgage interest, employer-provided health insurance and other things that Congress has chosen to promote. The other, at the top of the income scale, is the fact that capital gains and dividends are taxed at much lower rates than employment income. To propose mending such a system by raising the highest marginal rate misses the point.
The base needs broadening, so that marginal rates can stay put or even come down while revenues go up. That is what the Bowles-Simpson commission and other fiscal inquiries have suggested. Mr Obama has inched in this direction lately by mentioning the case for reducing “tax expenditures” (ie, limiting the value of tax deductions), but the president has given the idea nothing like the prominence of higher top marginal rates.
You do not need to think that reversing the Bush tax cuts will destroy incentives and cripple small businesses, as the GOP claims, to believe that higher marginal rates are not the best solution. And you do not need to think that Mr Obama is a class warrior to believe that his line on the failure of “millionaires and billionaires” to pay their fair share is misleading voters about what needs to be done.
Speaking of the electorate, though, what are the political merits of the president’s approach? The economics looks wrong, you might think, but the electoral calculation might make sense. Democratic strategists examine their spreadsheets and say it does. It’s the politics, stupid. “Soak the rich” polls well.
On this, caution would be wise. Most of the electorate may approve of higher taxes on the rich – along with other measures. But they will notice if Democrats have nothing else to suggest; and they will worry if they think Democrats see heavier taxes on the rich, and possibly not-so-rich, as an end in itself. Mr Obama tries to avoid giving that impression, but his allies in Congress, who swoon every time he says “millionaires and billionaires”, do not.
It worsens the problem that the president’s line between the middle class (whose taxes he has promised not to raise) and what one Democratic party spokesman recently called the ultra-rich is a household income of $250,000. The figure is too low. True, less than 3 per cent of households make that much at any one time – but a police officer married to a civil servant could sneak into this category. Income varies during one’s lifetime, so a far larger number have crossed the line, or will do, or hope to, during their peak earning years.
To suggest that a couple making $240,000 is middle class, whereas one making $260,000 is in the same bracket as Mark Zuckerberg or Warren Buffett for the purposes of tax justice, is simply inept.
The US detests Wall Street plutocrats for their ill-gotten gains, and it expects the rich to help get the federal budget under control – but this is still a country that applauds work, brains, ingenuity and well-earned success.
Mr Obama and the Democrats forget that at their peril.
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