Obama’s Tax Confusion

Is the President Ignoring the Facts or Simply Lying?

By Alexander Variano 

“One of Barack Obama’s great gifts is the ability to say things that are absolutely absurd and make them sound not only plausible, but inspiring.” –Thomas Sowell

With an upcoming election, politicians readily cue the dramatic rhetoric: “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,” President Obama declared in September.

The President rightly fumes at the idea that blue collar workers should pay higher tax rates than the wealthiest Americans. Luckily for him, this is demonstrably false. Internal Revenue Service data shows that in 2008, earners making between $25,000 and $50,000 a year paid on average 5.32 percent of their adjusted gross income in federal taxes and the $50,000 to $100,000 segment paid 8.41 percent. Meanwhile, income over $10 million faced an average rate of 20.89 percent. Since twenty is greater than either five or eight, the President is wrong that construction workers face higher tax rates than Kardashian family members.

The President further revealed his own unfamiliarity with the tax code by asking, “Explain why somebody who’s making $50 million a year in the financial markets should be paying 15 percent on their taxes, when a teacher making $50,000 a year is…paying a higher rate.” Obama probably knows the difference between ordinary income and capital gains. Long-term capital gains are taxed 15 percent for taxpayers in or above the 25 percent ordinary income tax bracket and 0 percent for taxpayers in or below the 15 percent bracket (short-term gains of less than a year are taxed as ordinary income). So the explanation, Mr. President, is that capital and wages are two different types of income, and are taxed accordingly.

One reason capital income is preferentially treated is because it is variable, unlike fixed labor costs. Employers are obligated to honor wage contracts under most circumstances, while those counting on capital income are subject to the outcome of their own investments. The IRS only collects revenue in the year that long-term capital gains are realized, but that income likely took years to generate, as homeowners maintained their houses, business owners expanded their operations and shareholders endured market fluctuations. The prospect of keeping a larger share of after-tax income gained through investment versus labor is an important tool to encourage capital investment.

Still, Obama has long viewed capital gains as a way for wealthy Americans to avoid paying their share of taxes. Asked in 2008 why he would raise the capital gains tax if revenue increased after rate cuts in 1997 and 2003, he explained, “I would look at raising the capital gains tax for purposes of fairness.” The 15 percent rate is illusory since it does not reflect the double-taxation of business income or dividends. A business must generate $1.80 in profits for an investor to pocket $1 in post-tax income, since the IRS imposes a 35 percent rate on corporate income and another 15 percent on any dividends paid out from that income. Investors who put their capital at risk pay taxes on any such future income at a favorable rate—if any income is generated at all. What concept of “fairness” justifies raising taxes on the bold entrepreneurs and investors that make our economy the world’s strongest?

Since our national productivity depends on investment, preferential tax treatment induces investors to take on the risk of starting businesses and buying capital assets. What will happen if Obama successfully raises the capital gains tax? The basic law of tax incidence means there will be less capital in private markets, and a smaller share of after-tax profits means fewer entrepreneurs will open businesses, hire workers and invest in capital. Even if additional federal revenue were put to good use, why extract it at the cost of less liquidity in markets, fewer new jobs created and ultimately a reduction in the quality and quantity of goods and services for all Americans to enjoy?

When the President claims that the wealthiest Americans pay lower tax rates than middle-class taxpayers, he brazenly disregards the findings of his own Treasury Department. The President could honestly discuss what constitutes a “fair share,” but the fact that the top 1 percent of taxpayers pays 37 percent of all tax revenue (while earning 17 percent of all income) would inconveniently disrupt his narrative. Instead, he vilifies one class of Americans in blatant contradiction of the factual data. Hopefully voters are less ignorant than President Obama.

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