Taxing the Rich, from Right to Left
Romney, Obama, Sarkozy, Hollande
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the May/June 2012 issue of Dollars & Sense magazine.
at a 30% discount.
“The Buffett Alternative: The Rich don’t pay lower average tax rates,” Wall Street Journal, Review & Outlook, September 20, 2011
“The Bottom 0.1%: The Buffett rule yields a pittance,” Wall Street Journal, Review & Outlook, March 21, 2012
“Sarkozy’s Last Stand: France’s choice now is more of the same or jump off the Socialist cliff,” Wall Street Journal, Review & Outlook, April 22, 2012
“Socialist France,” Wall Street Journal, Review & Outlook, May 7, 2012
The editors of the Wall Street Journal were seeing red when President Obama began touting the Buffet Rule as the key to restoring tax fairness to the U.S. tax code. But things went from bad to worse when François Hollande, the Socialist party candidate, topped the preliminary ballot for French President, the editors were reduced to bemoaning the “unenviable” choice facing the French electorate in the runoff election. And then got worse still two weeks later in the runoff election, when, as the Journal editors put it, “the French chose to to leap off the Socialist cliff without a parachute.”
The Buffett Rule backed by Obama comes off as a slap on the wrist when compared to Hollande’s plan to raise France’s top income tax brackets. And Obama tax policies would do less to tax the rich than the tax policies of Hollande’s opponent, the French neoconservative incumbent President Nicolas Sarkozy, would have if he had been reelected.
This is all bad news for the Journal editors, who consider pro-rich tax cuts the cure for any troubled economy, but let’s take a look just how much good news it is for the rest of us.
The Buffett Rule and Mitt’s Tax Holiday
The Buffett Rule takes its name from billionaire investor Warren Buffett, who quite rightly insists that a fair tax code would demand that his income be taxed at a higher rate than that of his secretary. That’s not the case with the U.S. income tax. The very highest-paid workers can pay a tax rate as high as 35% on their last dollars of wages, while investors pay no more than a 15% tax rate on any income from their capital gains or dividends, no matter now great their income. To ensure that millionaires and billionaires aren’t taxed at a lower rate than regular wage and salary workers, the Buffett Rule would impose a 30% minimum tax on anyone with an income of more than $1 million.
That might sound fair, but the Journal editors insist that the whole premise of the tax, that millionaires currently pay lower tax rates than middle-class employees, is “a fairy tale.” And they believe they’ve got the numbers to prove it: the average income tax rate paid by millionaires in 2008 was more than twice the rate paid by taxpayers with income in the $50,000 to $100,000 range.
But the Journal editors’ numbers are hardly convincing. To begin with, they look at just income tax rates and not all federal taxes, in that way ignoring Social Security and Medicare taxes, among other federal taxes. When the Congressional Research Service (CRS) looked at all federal taxes, they found that the difference in the average tax rate of millionaires (24%) and the average rate for moderate income taxpayers with income under $100,000 (19%) is far smaller than what the editors’ numbers suggest. In addition, the editor’s numbers are average tax rates that obscure the variation in tax rates within income groups. And that too makes a difference. For instance, the CRS found that “roughly a quarter of all millionaires face a tax rate that is lower than the tax rate faced by 10.4 million moderate income taxpayers.”
The tax plans of Republican presidential candidate Mill Romney would not correct this gross inequity—it would make it worse. Romney would continue the pro-rich Bush tax cuts, repeal the estate tax, and then lower the federal income tax rates, including dropping the top bracket from 35% to 28%. Altogether, his proposal would reduce the tax rate of the richest 1% of taxpayers, with an average income of $1.4 million, by three times as much as the tax rate of a middle-income taxpayer, with an average income of $42,000. Those cuts would also likely slice as much as $3.4 million off Romney’s own tax bill in 2013.
For the Journal editors, not only is the Buffett Rule bad, but its portions are small. According to the Congress’s Joint Economic Committee, the Buffett Rule would raise no more than $47 billion in new tax revenues over the next decade, assuming the Bush tax cuts for the rich are allowed to expire. But the combined effect of the Buffett Rule and allowing the Bush tax cuts for taxpayers with income above $250,000 to expire, including letting the top income tax bracket rise to 39.6%, as Obama has proposed, would raise more than $1 trillion additional tax revenues over the next decade. A study by the nonpartisan Tax Policy Center found that those two tax changes would take an additional 5.3% of income of the top 1%, pushing their effective federal tax rate (or how much of their income they paid in all federal taxes) up to 36.8%. That would be just about what the richest 1% paid out in federal taxes in 1979, before three decades of pro-rich tax cuts. They can well afford it. From 1979 to 2007, the after-tax income (corrected for inflation) of the top 1% nearly tripled, increasing 281%, while the income of those in the middle of the distribution of income increased just 35% over those years.
Taxing the Rich, French-Style
The top income-tax bracket in France is already 41%, higher than even the 39.6% rate Obama would impose. In addition, French investors pay a tax of 32.5% on their capital gains as opposed to the 15% rate in the United States. On the other hand, the Sarkozy government enacted a “tax shield” to protect rich taxpayers. This cap stipulates that no taxpayer will pay more than half their income in national taxes (the sum of what they pay in income taxes and other taxes). The tax shield has led to the unseemly practice of the French government writing out large refund check for income taxes withheld to some of its wealthy citizens at the same time it lays off public employees and its budget deficit soars.
Sarkozy’s tax policies were a mixed bag. Early on in his term, his tax cuts, especially the tax shield, overwhelmingly benefited France’s richest 10%, although he also eliminated taxes on overtime pay as a political response to the 35-hour workweek backed by the Socialist Party. After that, Sarkozy went along with imposing an additional 3% levy on taxpayers with a incomes greater than $650,000, and in the recent presidential campaign he pledged not to lower taxes for the rich. Earlier this year he promised, if reelected, to take the lead in pushing for a financial transaction tax (on the trades of stocks and other securities) that he argued would have those who caused the financial crisis “repay for the damage they have caused.” That’s a measure President Obama has never endorsed publicly. Finally, the conservative Sarkozy has endorsed these policies in a country with a tax code that has a wealth tax and a substantial estate tax and where the share of income of the richest 1% is but one half that in the United States.
In his debate with Sarkozy, Socialist Party presidential candidate Francois Hollande promised that under his administration, “the richest [w]ould be sending checks to the treasury” and not the other way around. Hollande intends to push up the top French income tax bracket to from 41% to 75% for income over one million euros (or about $1.3 million).
On other economic issues, Hollande would insist that the European Union adopt a “growth pact,” which would include a financial transaction tax and government bonds jointly issued by the Eurozone countries to finance infrastructure projects. On top of that, the Hollande campaign championed financial reforms from banning stock options and management bonuses to separating investment and retail banks, two measures rejected by the Obama administration. We will now see just how much of his economic program Hollande can get enacted in France or across the Eurozone.
No Socialists Here
It is hardly surprising that Mitt Romney’s campaign positions are far to the right of the mainstream of French political debate. Nor is it surprising, even though Republicans contend otherwise, that the Obama campaign’s policies on financial reform and taxation are far from the socialist positions of Hollande. But when it comes to taxing the rich, the Obama campaign’s policies are more conservative than the policies endorsed by France’s center-right ex-president Sarkozy.
If the Obama campaign did no more than add a financial transaction tax, endorsed by Hollande and Sarkozy, to the Buffet Rule and the repeal the Bush tax cuts for the well-to-do, which it already advocates, those measures, if enacted, would counteract a good bit of today’s gaping inequality and financial instability. And that surely would send the Journal editors scurrying off to their medicine cabinets in search of a bottle of Maalox, assuming there is something left in the bottle now that they have had to stomach the news of a “Socialist France.”