Obama and the Buffett Rule

If there's any consolation at all here, it is that Mr. Obama is positioning himself going into the election as the candidate of tax increases.

If there were some kind of award for the most misleading statements in a single four-minute speech, President Obama would have earned it with his weekly address this weekend, timed for tax day.

"We can't afford to keep spending more money on tax cuts for the wealthiest Americans," Mr. Obama said.

This is really something. First of all, who is the "we" in that sentence? The many Americans who don't pay any income taxes at all, or who take more from the government in welfare or entitlement benefits than they pay in taxes? Second, it's great to see Mr. Obama start to crack down on unaffordable government spending. But it's hard to define tax cuts as spending unless you start from the concept that all money belongs to the government to begin with. It's one thing to conceive of some special tax break as a "tax expenditure." But it's not "spending" for the government to allow an individual to keep money that the individual earned or owned in the first place.

Mr. Obama went on: "This week, Members of Congress are going to have a chance to set things right.  They get to vote on what we call the Buffett Rule. It's simple:  If you make more than $1 million every year, you should pay at least the same percentage of your income in taxes as middle-class families do.  On the other hand, if you make less than $250,000 a year—like 98 percent of American families do—your taxes shouldn't go up. That's all there is to it."

Here is some language from the actual text of the Buffett Rule legislation, which Mr. Obama calls "simple": 

SEC. 59B. FAIR SHARE TAX.

"(a) GENERAL RULE.— "(1) PHASE-IN OF TAX.—In the case of any

high-income taxpayer, there is hereby imposed for a taxable year (in addition to any other tax imposed by this subtitle) a tax equal to the product of—

"(A) the amount determined under paragraph (2), and

"(B) a fraction (not to exceed 1)— "(i) the numerator of which is the excess of—

"(I) the taxpayer's adjusted gross income, over

"(II) the dollar amount in effect under subsection (c)(1), and "(ii) the denominator of which is the

dollar amount in effect under subsection (c)(1).

 "(2) AMOUNT OF TAX.—The amount of tax determined under this paragraph is an amount equal to the excess (if any) of—

"(A) the tentative fair share tax for the taxable year, over

"(B) the excess of— "(i) the sum of—

"(I) the regular tax liability (as defined in section 26(b)) for the tax- able year,

"(II) the tax imposed by section 55 for the taxable year, plus

"(III) the payroll tax for the taxable year, over

"(ii) the credits allowable under part IV of subchapter A (other than sections 27(a), 31, and 34). 

Got that? As President Obama says, "It's simple."

And, as Bloomberg News's Richard Rubin reported, the Buffett Rule, as proposed, doesn't apply to income from tax-free municipal bonds. So when Mr. Obama declares, "That's all there is to it," it's not true. That's really not all there is to it.

There's more. President Obama declared, "the thing is, for most Americans like me, tax rates are near their lowest point in 50 years." The most important word in that sentence is "near." The top individual income tax rate from 1988 to 1990 was 28%. In 1991 and 1992 it was 31%. Now it is 35%. For much of the past 50 years the payroll tax was also lower, and applied to a smaller income base. Nor does Mr. Obama mention that one reason tax rates were so high for much of the past 50 years is that America was paying for a military buildup to win the Cold War against Soviet Communism. That war is over.

Obama continued, "In 2001 and 2003, the wealthiest Americans received two huge new tax cuts.  We were told these tax cuts would lead to faster job growth. Instead, we got the slowest job growth in half a century, and the typical American family actually saw its income fall." Not true. After those tax cuts, which went not just to the "wealthiest Americans" but to all Americans, the economy actually added jobs faster than it did in the first two years of the Obama administration, during which Mr. Obama has been trying to repeal the tax cuts on the "rich." As to whether "the typical American family actually saw its income fall," it depends on what period of time you look at, but some studies that look at post-tax, post-transfer income and that include the value of employer-provided health insurance show a different picture.

Mr. Obama went on, "On the flip side, when the most well-off Americans were asked to pay a little more in the 1990s, we were warned that it would kill jobs. Instead, tens of millions of jobs followed." Those jobs followed largely after the Republicans took over Congress in 1994 and after the North American Free Trade Agreement went into effect the same year. Seeing the 1990s as a decade of tax increases is a misreading of history. The right tax aspects of that decade to focus on are the Nafta and GATT/WTO tariff reductions that Lawrence Summers has called "the largest tax cut in the history of the world," and the law President Clinton signed in 1997 cutting the capital gains tax rate to 20% from 28%.

If there's any consolation at all here, it is that Mr. Obama is positioning himself going into the election as the candidate of tax increases. As it gets closer to November, if the Republicans are even marginally competent (a big "if") he'll have a tougher time getting these sorts of misleading statements off unchallenged.

Ira Stoll is editor of FutureOfCapitalism.com and author of Samuel Adams: A Life.