In the Name of Fairness

     

    President Obama has found a platform for his re-election campaign. He will the be the one that we are waiting for. He will be the guarantor of fairness, health insurance, and jobs in a time of economic anxiety. Republicans will be put in a position to defend a tax code that punishes the middle-class, to deprive people of health care, and to oppose Obama's jobs program. But behind the rhetoric of fairness, the positions of the Obama administration leave much to be desired.

    White House Senior Advisor David Plouffe tells us that President Obama believes “that the right way to get the fiscal house in order is to ask the wealthy to pay their fair share” and raise their taxes. The so-called Buffett rule (named in honor of billionaire investor Warren Buffett) and other tax proposals advocated by Obama would raise taxes on most individuals (small business are frequently taxed as individuals) with an annual income of $1 million or more. The Obama administration does not scruple to note that the wealthy already pay more in taxes as a percentage of their income than everybody else.

    In their fact-checking, the Associated Press (hardly a right-wing organization) found that households exceeding $1 million in annual income pay roughly 29.1 percent of their income in federal taxes. Households in the $50,000 to $75,000 range pay roughly 15 percent. Those in the $20,000 to $30,000 range pay 5.7 percent.

    Of course, a small number of the very wealthy do not pay their “fair” share. For example, Warren Buffett is one of the wealthiest people on the planet and he apparently pays less in federal taxes than his secretary – a feat he achieves by taking advantage of the tax loopholes and shelters that he derides. Dramatic tax reform similar to one achieved during the 1980's would be a remedy as would a simpler (and flatter) tax, but Obama's proposals fall well short of that goal and by advocating tax hikes during an economic downturn he appears to be ignoring his own advice from 2009: “The last thing you want to do is raise taxes in the middle of the recession because that would just suck up and take more demand out of the economy and put business in a further hole.”

    Yet some liberals are adamant in their support for (among other things) raising taxes in spite of the impact it could have on job growth (see Warren Buffett). Charlie Fink of the Agenda Project claims, “I have built and run businesses... through booms and busts... Taxes were never, ever, a factor in my decisions about hiring.” Never ever?

    Obama's latest job creation program (which would be called a stimulus package if the other one had worked) calls for a temporary reduction in payroll taxes and tax credits for businesses that hire new workers. The point of such reductions is to stimulate job growth. One wonders what economic rationale allows supporters of Obama's tax and job programs to claim that raising taxes on businesses does not impede job growth while simultaneously claiming that lowering taxes does encourage it.

    Perhaps it is the same sort of reasoning that motivates supporters of Obamacare like former House Speaker Nancy Pelosi to ban health insurance policies that charge females policyholders a higher premium than males and insurance policies where policyholders with a pre-existing condition are charged a higher premium than policyholders without one. We are told that “no longer would being a woman be a pre-existing condition.”

    Pelosi and others think it is unfair for insurance companies to charge women four or five dollars extra in monthly premiums. They don't seem to mind the idea of forcing a man to pay higher premiums for an individual health insurance policy that covers birth control pills, morning-after pills, maternity care, and well-baby visits. They think it is unfair to charge someone more if they have diabetes but find it acceptable to charge a healthy 60-year-old three times more than a sickly 30-year-old; apparently, fairness demands that pre-existing conditions must be ignored but age should not when one is trying to ban discrimination on the basis of medical history.

    Fairness is an almost universal human sentiment, but fairness as a political doctrine has serious limitations. For the Obama administration, it is a buzzword that barely disguises the weaknesses of its domestic policy.

Super-Rich Pharisees

     Billionaire investor and philanthropist Warren Buffett has called on Congress to “stop coddling the super-rich” and raise taxes on the wealthy to deal with our nation's fiscal woes in his most recent New York Times op-ed (www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html). He claims that the taxes he pays are only 17.4 percent of his taxable income and that it is time to engage in shared sacrifice and raise taxes on him and his “mega-rich friends” (those who make $1 million or more a year in income, dividends, and capital gains). Buffett's seemingly altruistic recommendations parallel that of fellow billionaire philanthropist Bill Gates' proposal in 2010 for Washington state to create an income tax for those making more than $200,000 annually. His tax proposals might seem like a quick and easy way to raise revenue, but what are the real consequences of his proposals?

     

     According to Buffet, we need not worry about how raising such taxes might undermine economic growth. He writes, “I have worked with investors for 60 years and I have yet to see anyone... shy away from a sensible investment because of the tax rate on the potential gain.” Such an assertion flies in the face of elementary microeconomics. Increasing taxes on the potential profit from an investment alters the expected return and rational investors will adjust their behavior accordingly.

     He insists that “people invest to make money, and potential taxes have never scared them off.” Never? Does Buffett expect people to believe that investment behavior is somehow different from all other forms of economic behavior where people weigh costs against benefits? If so, one wonders why we don't have a capital gains tax of 99.9 percent!

     During the 1950's, America's top marginal income tax rate was roughly 90 percent. Some liberals look upon those tax rates with nostalgia but only because they do not realize how little revenue the government was able to collect; few of the rich ever paid the top tax rate because they either didn't bother earning additional income that would be taxed at 90 percent or they found other ways of earning wealth so that it would be not taxed. President Kennedy changed that when he dramatically reduced taxes for the rich and revenue collection grew.

     But it is not the 1950's and the top marginal tax rate is roughly 35 percent. Increasing taxes on the wealthy might very well lead to increased revenue. However, many conservatives fear that increasing revenue collection through tax increases on the wealthy will take the pressure off Washington D.C. to reduce spending and reform entitlements. Furthermore, higher taxes could make America less business friendly and less competitive in the global economy. Soaking the rich might seem like a good idea... until you run out of rich people.

     The contrast between California and Texas is illuminating. High taxes in California hasn't translated into generous benefits for California where the unemployment rate is amongst the nation's highest. In Texas, tax rates are low, government services are comparable, and unemployment is amongst the nation's lowest. 

     Warren Buffett has undoubtedly heard such arguments but he dismisses them and proclaims, “My friends and I have been coddled long enough by a billionaire-friendly Congress,” and that it is time for shared sacrifice. If Mr. Buffett feels that he should be paying more taxes, he could easily forgo his dividends and capital gains (where he pays a roughly 15% tax) and collect a comparable salary from Berkshire Hathaway instead (where he would pay roughly 35%). He does not need to declare his charitable contributions and claim associated deductibles on his tax return. Yet, he states that he and many other mega-rich folks “wouldn't mind being told to pay more in taxes.” If Mr. Buffett likes paying taxes so much, why doesn't he pay more?

     If he did so without announcing it in a Times op-ed, it would nullify the most tangible consequence of his tax proposals: convincing people that he is a great guy. It is that same impulse that compels someone to hold a press conference for his own philanthropy and lands him on the cover of Fortune magazine. Note the reference in his op-ed to the Giving Pledge (which he helped create) and the title of a previously published NYT Buffett op-ed: “Buy American. I am.”

     To be fair, Mr. Buffett is hardly alone. Bill Gates' tax-the-rich proposal would have created a 5% percent income tax in the state of Washington for those making over $200,000. The ballot measure was defeated with 65% of voters opposing it.