In a speech delivered Tuesday, President Obama is proposing hiking taxes on the wealthy to fix America’s fiscal problems. The Buffett Rule would require millionaires to pay at least 30% of their income in taxes. Not only is this flawed tax policy, it will fail to raise enough revenue to pay for President Obama’s out-of-control spending habit.
President Obama asserts that Buffett Rule would "stabilize our debt and deficits for the next decade,” but this couldn’t be farther from the truth. The Buffet Rule would fail to raise enough revenues to pay for President Obama’s out-of-control spending. The policy would only raise $46.7 billion over the next decade, which is negligible, considering that the federal government is projected to incur a $7 trillion budget deficit during that same period.
The Office of Management and Budget under President Obama claims that the Buffett Rule could replace the Alternative Minimum Tax, but a recent report from the Tax Policy Center shows that this is not the case. The policy would fall nearly $1.1 trillion short, in fact. “So until someone figures out how to clone rich taxpayers, it's unlikely the revenue generated by the Buffett Rule could match [the AMT]," observes Jeanne Sahadi at CNNMoney.
Missing in President Obama’s calculus is the fact that wealthy people already pay more in taxes. After all, the majority of Americans (51%) don’t pay any federal income tax whatsoever. Progressives may bemoan that billionaire Warren Buffett faces a lower tax rate than his secretary, but this is not the whole truth. The rich pay more in taxes, in absolute terms, and as a percentage of their income. Even if the Buffet rule weren’t enacted in 2015, nearly all millionaires would already be paying more in taxes as a percentage of their income than those in the middle class.
The Buffett tax is bad policy because it increases complexity and undermines neutrality in the tax code (i.e., it treats some groups differently than others). “It just doesn't make any sense to have one set of rules that applies to some people and one set of rules that applies to everyone else," said Syracuse University professor Leonard E. Burman. The purpose of the tax system is to raise needed revenue for core functions of government – not to redistribute income, pick winners and losers, or micromanage the economy.
“Soak-the-rich” policies like the Buffett Rule also ignore that taxes don’t just redistribute income — they redistribute people. As Jack Kemp once said, “If you tax something, you get less of it.” Wealthy people are no exception to this rule. States that make their tax codes more progressive end up with revenue losses. Progressive tax codes shifts behavior and drives capital to states that have friendlier business climates.
For evidence that progressive tax policies don’t work, policymakers should look to the states. Consider the case of Maryland, which made its tax code more progressive in 2008 by enacting a tax on millionaires. As a result, high-income residents left Maryland in droves — and they took their tax revenues with them. In the wake of the tax hike, Maryland saw a 33% decline in tax returns from millionaire households. A Bank of America-Merrill Lynch study found that Maryland lost $1 billion of its net tax base in 2008 by residents moving to other states.
The economy would be better off if the government cut spending instead of raising taxes. President Obama and his advisors should look for ways to reform spending and lower tax rates across the board. The United States would attract more job creation and business activity — and, consequently, more tax revenue — if policymakers fostered a low-tax environment that encourages investment and innovation.