Obama should have proposed closing loopholes, not making more
“ASKING A billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.’’
So said President Obama in this week’s State of the Union speech. The billionaire in question was Warren Buffett, and his secretary, Debbie Bosanek, sat with Michelle Obama as the president delivered his remarks.
More than common sense, the notion that Bosanek - presumably earning more modest secretarial wages - pays more than a man earning millions is outrageous. Outrageous if true, that is. But Buffett says in 2010 he paid $6.9 million in federal taxes. It’s a safe bet Bosanek paid far, far less.
Obama’s statement, an attention grabber, was a piece of rhetorical overreach. Elsewhere, the president made clear his concern was tax rates, not tax amounts. Ordinary incomes (such as salaries) are taxed from 10 percent to as high as 35 percent (for amounts in excess of $388,350). But taxes on capital gains (the likely source of Buffet’s income) are usually around 15 percent.
Is that as bad as Obama makes it out to be?
Since we haven’t seen Bosanek and Buffett’s returns, it’s not even clear she paid a higher rate of taxes than her boss. An analysis prepared by the Tax Policy Center, a think tank, pointed out that the top 20 percent of income earners pay, on average, 25.5 percent of their incomes to the feds (including income and payroll taxes). Those in the middle bracket average 14 percent. In other words, if Bosanek indeed had paid a higher rate, she would be the exception, not the rule.
Note to Obama speechwriters: 25 is bigger than 14.
At the heart of Obama’s disgruntlement is that the government taxes capital gains at a lower rate than ordinary income. Even the rich get treated differently. A professional hockey player making $10 million a year would find most of his income taxed at 35 percent. An investor making the same amount would pay just 15 percent. Rather than shunning a visit to the White House, perhaps Tim Thomas should be protesting outside Mitt Romney’s home in Belmont.
Those who support lower rates for capital gains argue that those gains are derived from corporate profits, which are themselves already subject to corporate income taxes. The lower rate, they say, is an offset for what amounts to double taxation. More importantly - and this was an argument voiced frequently by Republicans and Democrats such as the late Paul Tsongas - the lower tax rate encourages people to make risky investments, which in turn spur the growth of the economy.
In other words, the rationale for the lower rate is to get people to change their behavior in ways politicians think desirable. That’s the same rationale that underlies all of the other deductions, exclusions, credits and the like that one finds in the tax code.
In fact, most of these loopholes don’t accomplish much; there is, for instance, little evidence lower capital gains rates have spurred more investment (an argument Buffett himself makes). But more broadly, tax policy should be “neutral’’ – it shouldn’t try to distinguish between differing kinds of economic activity, favoring some over others. That should be the job of a free market, not politicians.
But the tax code is anything but neutral. All of the varying exceptions we have built into it have made it horrendously complex and, inevitably, create bizarre loopholes (such as hedge fund managers being able to treat ordinary income as capital gains). It is also the reason Americans collectively spend an estimated 6.1 billion hours yearly preparing their tax returns, a fruitless drag on the economy.
It would have been terrific if the point of Obama’s claim about billionaires and secretaries had been that the code should be simplified, eliminating loopholes and treating all income the same. Far from it though. In his speech, the president proposed even more loopholes: breaks for companies than shun overseas operations, increased deductions for high-tech manufacturers, a bigger tuition tax credit, and new clean-energy tax credits.
Doubtless, all worthy goals. But their effect ultimately will be to increase further the difference in the amount of taxes some pay versus others. Obama is right. Taxes should be fairer. But by larding the tax code with even more complexity, all he’ll be doing is making it worse than ever.
Originally published in the Boston Globe on January 28, 2012.