President Obama has reversed course once again and now wants to raise taxes on the "rich" making above $250,000 per year. Obama is in dire need of additional revenue after proposing a $3.8 trillion 2011 budget -- containing the largest deficit in U.S. history at an estimated $1.6 trillion. Yet his latest share-the-wealth proposals make little sense.
Obama never distinguishes between the super-rich and the well-off. At one point, the president scoffed, "I don't need another tax cut, Warren Buffett doesn't need another tax cut." But Warren Buffett, unlike the building contractor or family dentist, is the world's third-richest man, worth nearly $50 billion. And Obama is probably the most privileged person on the planet, with all of his expenses covered -- from a nice free mansion at 1600 Pennsylvania Avenue to a huge private jet.
The rich and the poor are not separated across an impenetrable barrier. The president's $250,000 line in the sand is actually quite fluid. Most of those who make incomes above it did not do so 10 years ago -- and they won't, on average, 10 years hence. The income of well-off professionals and small-business people fluctuates widely as they ascend, peak and descend in earnings -- given factors like health, age, and uncertainty in employment and business. It would be more accurate to say that raising taxes on the better-off is a sort of punishment for those who break into the top brackets for a few short years and try to be careful to save what they make and not spend what they don't.
The super-rich pay in taxes a far smaller percentage of their income than do the well-off. An array of blue-chip tax lawyers and Byzantine write-offs -- and paying at the capital gains rates rather than the income tax rates -- allows the Buffetts of the world to praise higher taxes while they connive to pay at lower rates than most others.
The IRS reported that the 400 richest Americans paid only 17% in federal income tax. A corporation like General Electric -- run by Obama pal Jeffrey Immelt -- paid no taxes on its $14.2 billion in profits.
Nearly half of American households pay absolutely nothing in federal income tax. For them, the once-dreaded April 15 tax day is more a welcome time of tax credits, rebates and refunds. In February 2011, American households received more than $2.3 trillion in direct government support, more than was collected during those 28 days by the Treasury in personal taxes. In contrast, the now-demonized top 5% account for almost 60% of all federal income tax revenue -- a higher percentage than anywhere else in the Western world.
Until recently, falling revenue has not been the prime cause of these national deficits. In fact, the Treasury took in an all-time high of nearly $2.6 trillion in 2007. Unfortunately, spending skyrocketed well above the pace of inflation and annual revenue increases. Such profligacy ensures that even in a growing economy, increased tax revenues never match spending.
If the president wishes to raise revenue, he might first close loopholes. He also could start with his own cabinet. Treasury Secretary Timothy Geithner, who oversees the IRS, at one point did not pay his Social Security and Medicare taxes and took improper writes-offs. Attorney General Eric Holder did not pay long-overdue property taxes on a house he co-owned until recently chided to do so by the media. The husband of Labor Secretary Hilda Solis had overdue tax liens on property that went back 16 years. Cabinet nominee Tom Daschle withdrew from consideration due to past unpaid taxes.
Before raising taxes, Obama might first urge the super-rich to pay their taxes at the income tax, rather than capital gains, rate. Next, tell his own Cabinet officers to pay all the taxes they owe. Then he should pay more of the first family's costs when they jet to luxury spots like Martha's Vineyard or Vail. Finally, he might ask the nearly 50% of Americans who don't pay income taxes to pay at least 5% of their income in federal taxes -- to ensure that they see government as a taker as well as a giver.
Do all that and we would have more money -- and the president would be less likely to declare, "I don't need another tax cut."