I have recently had some fun tearing apart the numbers liberals (and other republicans) are trying to use to tear apart the republican field. A few days ago I posted a blog showing how misleading the liberals are in portraying Obama’s massive expansion of federal debt. Using numbers is a dangerous thing because, unlike other forms of rhetoric, numbers actually give us something to dig into. Thus it is with the BBL (Big Buffett Lie) that his secretary pays more in taxes than he does and the attack on Mitt Romney’s 15% average tax rate as being lower than that of middle class Americans. All of this blather falls under the liberal rubric of “unfairness.” I decided to play around with these numbers a bit and see just how unfair they really are and to whom they are unfair.
Part of the unfairness doctrine is that wealthy people like Mitt Romney pay “lower taxes” than less wealthy folks. There are so many misleading details buried in this statement it’s hard to know where to start, but let’s go for it.
On an absolute basis, of course, Mitt Romney pays far more in taxes than the average middle class Joe – about 450 times more, in fact. For example, a married person earning $50,000 per year will pay $6,654 in federal income taxes in 2011. Mitt paid $3,000,000 (in 2010). Divide 3,000,000 by 6,654 and you get 450. Mitt paid 450 times more in taxes than the middle class Joe! 450 times!! Fair? Unfair? You decide. But, wait, there’s more. A lot more.
While it is accurate to say that average Joe married person earning $50,000 is “in the 25% tax bracket,” it is not accurate to say such a person “is paying 25% in taxes” or even that such person is paying a higher tax rate than Mitt Romney. These are marginal tax brackets and only the last $34,500-$50,000 of income would be taxed at the 25% rate while the actual taxes paid by a married person earning $50,000 would be $6,654 or 13.3% of income (6,654/50,000). So, in fact, the average Joe is paying a LOWER overall rate than Mitt Romney’s 15%. This is Buffett’s Big Lie. I don’t know what he pays his secretary, but I’ve hired many over the years and very few of them make more than $50,000 (and if he’s paying his $1,000,000 a year she would be expected to pay higher taxes; maybe that’s part of his big lie – I don’t know). So, assuming he’s paying her about $50,000, it is inconceivable that she’s paying more absolute taxes (see above) and quite likely she’s paying a lower overall rate than the Big Liar (whose rate, like Mitt’s, is probably about 15%). It probably is true that her top marginal rate on ordinary income is higher than the Big Liar’s, but, as we saw above, that is as relevant as the fact that the Redskins won 3 Super Bowls in the late 80s and early 90s (sorry – I was struggling for a good “as relevant as….” analogy and I just felt like reminding my readers that the Skins were really good a really long time ago).
Now, let’s look more carefully at the 15% that Mitt actually paid. The 15% is almost completely on capital gains, the source of most of his income. But, the effective total federal tax on those dollars is more like 45% because the profits of the corporation were taxed at the corporate rate of 35% (one of the highest corporate tax rates of any country in the world; even President Obama has agreed it is anti-competitive), then again at the 15% capital gains rate when Mitt filed his return. Since Mitt and other shareholders ARE the owners of the company, the profits of the company inure to their benefit only and, thus, they are the ones who are effectively paying the 35% corporate tax on profits. So, indeed, Mitt’s effective tax rate is probably about 45% (15% on top of 35% – do the math) on most of the dollars earned, much higher than the rate (even the marginal rate) paid by the average Joe or the Big Liar’s secretary. Fair or unfair?
Now, as we start to dig deeper into the question of fairness, let’s look at who actually pays how much in taxes in the US? The top 1% pay 37% of all federal taxes (2009 numbers). Yeah, those evil one-percenters, who have been the proximate cause of demonstrations around the nation, are carrying nearly 40% of the load for the entire country. You’d actually think the Occupiers might say “thank you” instead of building squalid little villages in public parks. The top 5% pay 59%. The top 10% pay 70% of all taxes. The bottom 50% pay 2.25% of all taxes. So, in considering “fairness,” it’s probably relevant to consider the fact that while Mitt (and other wealthy folks) may pay a net tax RATE that is lower than the top marginal rate paid on ordinary income by someone in the bottom 50% of earners/taxpayers, the top 1% are paying way more than their “fair share” of taxes under any mathematical construct. And, if you include the top 20% in the analysis, they are, mathematically speaking, paying basically ALL of the taxes in the United States. The bottom half are paying essentially nothing. I find it puzzling to contemplate how that could be “unfair” to the folks paying close to nothing and overly generous to the folks paying basically everything. Seriously, I’m an open-minded guy (stop laughing) – can someone explain to me how that’s “unfair” to the folks paying basically nothing? Should they pay less than nothing? There’s a comment section below. Have at it.
Here’s a more controversial line of thought. Mitt paid $3,000,000 in taxes in 2010. We pay taxes to run the government so that the government can provide services to us – pave our roads, protect us with a military and police force, make sure we don’t get life saving drugs because the FDA is dysfunctional (I digress). Universally, at all levels of income, Americans do not believe the tax code should be used to redistribute income. Thus, it is interesting to consider whether Mitt used more government services than the average Joe making $50,000 who paid $6,654 in federal income taxes. I’m guessing probably not. Maybe Mitt even used fewer services (for example, if he sent kids to private vs. public schools). If two people are using the exact same level of government services, is it “fair” to ask one of them to pay 450 times more for those services than someone else using exactly the same level of services? Personally, I’m OK with a progressive tax code as I actually do believe that the more fortunate folks should pay more, but I do find it odd and offensive that a guy who pays 450x more for the exact same services is vilified and accused of paying unfairly LOW taxes. That’s mondo bizarro, folks.
Finally, suppose we were to concede that it is somehow objectively “unfair” that Mitt is paying 15% (which, in actual fact, may or may not be a lower rate than someone making less money, per the data above on Buffett’s Big Lie), then one has to propose a solution to rectify the alleged unfairness. How would you make it more fair? Well, there are only two possibilities: (1) Raise the tax rate on capital gains so that Mitt pays a higher percent or (2) Lower the tax rate on ordinary income. Let’s take #2 first because it is easy. If President Obama wants to lower marginal tax rates anywhere in the economic spectrum, he has my support. As the numbers above on who pays what show, it will only have an impact on economic growth if he does it for all taxpayers, but any tax cut on marginal rates is a good tax cut. #1 is way more complex.
In 2008, Charlie Gibson interviewed President Obama and asked him why he would support raising capital gains tax rates even though “revenues from the tax increased” when the rate fell. Obama replied, “I would look at raising the capital gains tax for purposes of fairness.” So, even Obama acknowledged that raising this tax would have a net negative impact on the economy and tax revenue, but he’d do it anyway for “fairness” even if that meant slower growth, higher unemployment, etc. This notion of symbolism over substance dramatically alters the landscape in the debate over fairness and feels antithetical to the founding principles of America. It seems to me that doing something in the name of fairness that would inherently make economic life worse for the middle class is, by definition, unfair to those middle class folks. Q.E.D.