Warren Buffett, President Obama’s favorite billionaire, once said that “you only find out who’s swimming naked when the tide goes out.”
Well, it looks like the tide has gone out for Obama when it comes to pushing his Buffett Rule “millionaire’s” tax. There was never much of an economic rationale for the idea. It would only raise about $5 billion a year over the next decade, a span when the U.S. is on track to compile average annual budget deficits of $1 trillion or more.
Wait, actually it would add nearly $800 billion to cumulative deficits because it would replace the Alternative Minimum Tax, according to government bean counters. No, wait some more! The numbers would probably be even worse. Other taxes targeted at the rich, such as President Bill Clinton’s 1993 tax hikes and recent tax increases in the UK, either raised less than forecasted or lost money.
As Bloomberg recently pointed out, affected taxpayers–fewer than 0.5% of Americans with annual incomes exceeding $1 million and tax rates of less than 30 percent–could avoid the tax via tax-free investments such as municipal bonds. They also could time asset sales for maximum tax benefits, engage in transactions that don’t result in taxable income, and make charitable contributions that yield deductions. “Largely, the Buffett rule is going to be manageable,” said David Miller, a partner at Cadwalader, Wickersham & Taft LLP in New York. “That is, with tax planning, people will be able to avoid it.”
Obama’s strongest argument, really, was his moral one: that having the rich pay a lower tax rate than middle-class voters was just plain unfair from an income inequality perspective. But now he seems to have abandoned that one, as well:
That is not an argument about redistribution. That is an argument about growth,” Obama said in response to a reporter’s question at a news conference in Colombia. “In the history of the United States, we grow best when our growth is broad based. This is not an argument about taking from A to give to B. This is not a redistributionist argument that we’re making. We’re making an argument about how do we grow the economy in a 21st century environment,” Obama said.
Really? If there is an Obama Rule, it is the one he articulated back in 2008 to Joe the Plumber, that we need to raise taxes to “spread the wealth around.” But I guess “spread the wealth” isn’t polling as strongly as Team Obama would like in 2012.
OK, so now Obama is focusing on the economic growth argument, his weakest one. Economic growth is produced by innovation and the acceptance of the creative destruction it brings. Obama would argue that by raising taxes, he could avoid cutting supposedly critical government investment to spur innovation. But is the federal government so lean and mean that the only way to reduce spending is by axing the NIH or the National Nanotechnology Initiative? Or is Obama talking about more Solyndra-style industrial policy? If that, better to keep that $5 billion in the private sector. And time for Obama to float some new economic ideas.