Obama And The Great Tax Hike Pinkie

Let me tell you how it will be:

There’s one for you, nineteen for me.

‘Cause I’m the Taxman.

Yeah, I'm the Taxman.

—The Beatles, Taxman

The guy simply has no shame.  He must think you're stupid.

On Monday Obama unveiled his new deficit-reduction plan, which includes several tax increases aimed at the “wealthy,”  i.e., those making over $250,000 a year.   As he has done since August, he is trumpeting this plan with the cry that the rich need to “pay their fair share.”  And piggy-backing on the silly ramblings of an obviously senile Warren Buffett (who for all his airs of undertaxation guilt hasn’t yet managed enough remorse to call off his nearly decade-old dispute with the IRS and simply write the check on back taxes he’s owed since 2002) Obama calls part of his plan the “Buffett Rule,” backed by this whopper: 

“It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.” 

Is anybody really this gullible? 

Well, for those who just might be, let me try to walk you through it. 

To begin with, Obama is leveraging off of statements Buffett has made for years that he pays something like a 17% rate, while his secretary pays a 30% rate.   But let’s define our terms.  A “marginal” tax rate is the tax rate applicable to the last dollar earned (what we sometimes call our tax “bracket”).  Someone in the 33% tax bracket doesn’t pay 33% of their income in taxes, because income is taxed “progressively”; that is, the first $12,000 (for head of household) or so is taxed at 10%, earnings between that and $46,000 or so are taxed at 15%, and so on.  So the “effective” tax rate— the percentage of total earnings actually paid as tax—is necessarily something considerably lower than the marginal rate.  The 30% Buffett applies to his secretary is almost certainly a rounded reference to the 28% marginal rate applicable to income between $70,000 and around $212,000 (depending on filing status), which means is he’s disingenuously comparing his effective tax rate against his secretary’s marginal tax rate, which is apples and oranges; her effective tax rate would likely be something more like 10%, well below the 17% effective rate Buffett claims he pays (when he bothers to pay it).   

And, as has been widely observed, the bulk of Buffett’s earnings are in the form of dividends that are not taxed as ordinary income like salaries, but are instead taxed at the capital gains rate of 15%.  Sounds unfair until you understand that because those dividends are paid from corporate profits, they’ve already been taxed as corporate income at 35%, the highest corporate income tax rate in the industrial world.  For example, assume ACME makes $1000 in profits and elects to pay Wile E. Coyote a 1% dividend.  You’d think that would mean Mr. Coyote gets $10, which would net him $8.50 after the 15% capital gains tax.  But he doesn’t.  ACME first has to pay a 35% corporate income tax, leaving only $650 to pay its shareholders.  Coyote’s 1% is actually $6.50, upon which he then pays capital gains of $0.98.  Instead of netting $8.50, he nets $5.52; the total tax extracted from the original $10 is $4.48, or just under 45%.   

When the corporate tax is factored back in, Buffett’s real effective tax rate is something more like 40%.  Buffett’s complaint that he’s taxed less than his secretary sounds nice and makes him look generous, but it has no basis in reality, and he knows better. 

Apparently in the course of urging him to get tough with the Right, the Obama’s advisors not only neglected to fact-check the Oracle of Omaha, they also forgot to hand Obama a calculator.  The whole pitch depends on the premise that the rich pay lower tax rates than middle income households.    He says, “This is not class warfare, it’s math.”   

Well, let’s just look at his math. 

Assume A earns $50,000 in adjusted gross income, and B earns $250,000.  For 2011, the marginal tax rate for A is 25% (assuming head of household status), which applies to $3,750 of his income.  For B, the marginal tax rate is the maximum 33%—a third higher than A’s rate—which applies to $56,650 of his income.  According to the IRS, in 2009 (the last year for which data is available) the average total income tax as a percentage of adjusted gross income (essentially the effective tax rate) was 5.3% for A, and 17.5% for B—three times A’s rate.  The 2009 average total tax liability (income tax plus all other taxes, including Social Security taxes, and net of all tax credits) was approximately 6.4% for A, and 23.1% for B—nearly four times A’s rate. 

But what about millionaires and all their loopholes?  Well, for those of you drinking that Kool-Aid, let’s first remember that most credits and deductions get phased out as income increases, such that at higher income levels they’re no longer available.  Second, they are presumably baked into the data put out by the IRS since it’s based on total tax reciepts, so we can do the same comparison as above and add in C, a head of household earning AGI of $1,000,000:

	A—$50,000	B—$250,000	C—$1,000,000
2011 Marginal Rate	25%	33% (+32% over A)	33% (+32% over A)
2009 Total Income Tax as a % of AGI	5.3%	17.5% (+230% over A)	24.4% (+360% over A)
2009 Total Tax Liability as a % of AGI	6.4%	23.1% (+261% over A)	31.2% (+388% over A)

According to data compiled by taxfoundation.org, in 2008 the top 10% of earners had an average income tax rate (the percentage of AGI paid as income taxes) of 18.71%; the bottom half had an average rate of just 2.59%.   

This isn’t demagoguery, or wishful thinking, or some sort of latent racism.  This is, as Obama says, “just math.”  Obama’s claim that the wealthy are taxed at a lower rate than the middle class is simply and objectively false any way you slice it, and one suspects that Obama, like Buffett, knows better.   

Not only do the wealthy pay a higher percentage of their income in taxes, but it bears repeating that they also pay the vast majority of the total tax tab, and a much higher percentage of that tab than the share of income they receive.  In 2008 the wealthiest 10% paid 70% of total federal income taxes, while earning only 45% of the nation’s adjusted gross income, for a total relative burden [(share of taxes – share of income)/ share of income] of +56%.  By contrast, the bottom 50% of wage earners received 13% of the nation’s adjusted gross income, but paid less than 3% of the total income taxes, for a total relative burden of -333% (the negative number indicating they paid a lesser share than they received).  We spend a combined $1.4 trillion a year on unemployment benefits, Medicare, and Medicaid.  This means that after taking from higher earners a greater percentage than the share they receive, nearly 40% of total federal spending consists of nothing more than giving that money to others.  I hear repeatedly from folks on the Left that “I don’t mind paying more in taxes to help people.”  Trouble is, it’s virtually certain that they’re not; they’re insisting that someone else pay more.   

Obama says higher earners aren’t paying their fair share; that they pay a lower tax rate than do lower wage earners; that this isn’t class warfare, but simply math.

Mr. President, I have two words for you:

You lie.