Soak the Rich

In an April 2008 presidential debate between Senators Barack Obama and Hillary Clinton, moderator Charlie Gibson pointed out that both times the capital gains tax had been cut in the past two decades, revenue had increased, and that it had gone down when the tax was raised in the 1980s. Despite this, then-candidate Obama said he would “look at” raising the capital gains tax “for purposes of fairness,” lamenting the injustice of an economy that allowed the top 50 hedge fund managers to earn $29 billion in 2007.

In other words, we have a President who is willing to raise taxes, even if it means lower revenues, for the sake of reducing the income of the rich. This class warfare mentality is reflected in the rhetoric he has used to defend certain tax provisions of the American Jobs Act that he introduced a couple of weeks ago. By insisting that certain segments of the population are not paying their “fair share,” President Obama is perpetuating an unfortunate focus on taking from the haves rather than helping the have-nots.

The jobs bill is certainly not without merit. For one thing, it contains a sensible proposal to limit the ability of high-income taxpayers to take deductions. Thanks in large part to administrative costs that accompany tax exemptions, the National Taxpayer Advocate estimates that Americans spent $163 billion in 2008 to comply with the tax code’s requirements. Harvard economist Martin Feldstein has argued that reform of the kind included in the bill would raise revenue while lowering compliance costs and avoiding the unpleasant behavioral effects of higher tax rates.

Of course, the bill would largely negate this by adding several new tax expenditures, and discouraging capital investment by raising the tax rate on profits earned by general partners of long-term investment partnerships. But what is concerning from a political perspective is how the President has advertised these proposals. In his September 8 address to Congress and several speeches thereafter, he has not focused on the huge efficiency gains to be made from reducing the complexity of the tax code, or the virtue of raising revenue without the adverse effects of a tax rate increase. Instead, he has lamented tax breaks for “millionaires and billionaires,” whom he defines as individuals making over $200,000. At the same time, he has complained that most people in the country must “struggle to make ends meet” while the wealthy “enjoy tax breaks and loopholes that nobody else gets.”

No doubt the wealthy live comfortably and benefit disproportionately from tax exemptions, but to suggest, as the President has, that they are not paying their “fair share” is to betray either an ignorance of the federal tax structure or an extreme conception of fairness. In 2008, the top one percent of taxpayers, who earned a fifth of the country’s adjusted gross income, paid 38 percent of federal individual income taxes. The top five percent contributed 58.7 percent of these taxes—far more than the bottom 95 percent. A call for these citizens to pay even more should at the very least be accompanied by an acknowledgment of how much they are paying already.

Among the wealthy, the President has targeted a couple of groups in particular. One is the oil industry, whose profitability he has decried since at least 2007 when he advocated a windfall profits tax on oil companies. Another is corporate jet owners. In a press conference last June, he took six separate swings at private flyers, suggesting at one point that the nation needed to choose between tax breaks for jet owners and the safety of children.

True to form, the Jobs Act would phase out several deductions for the oil and gas industry, and repeal the bonus depreciation deduction for those purchasing corporate jets. These measures would generate $43 billion in new revenue over the next decade, out of a projected deficit of about $3.5 trillion. Something is better than nothing, but why is President Obama singling out two small provisions in a tax code replete with carve-outs for diverse industries and activities? It could be that White House economists painstakingly scoured federal tax policy and determined that these two adjustments were the best way to raise revenue with minimal efficiency reduction. More likely is that President Obama is leveraging the unpopularity of corporate jet owners and the oil industry to push his agenda at their expense.

Even assuming the President’s proposals have salutary economic effects, the fact that he is selling them by stirring up envy among working class citizens is disturbing. There is a strong case that the rich should pay more, but it should be made by illustrating how such a proposal would serve the interests of the nation as a whole, while acknowledging the significant contributions high-income earners have already made. In a time when prominent voices have warned of civil unrest if the economy does not improve, an attempt by the President of the United States to pit the poor against the rich is unhelpful at best.

Peyton R. Miller ’12 is a government concentrator in Winthrop House. His column appears on alternate Tuesdays.