Reagan Would Have Supported The Buffett Rule
President Obama’s defense of what The New York Times calls “the centerpiece of his reelection campaign” reached new levels of comedy this week when Obama claimed that Ronald Reagan would have supported raising taxes on the American people. Speaking at in the Eisenhower Executive Office Building, Obama said:
[I]t is just plain wrong middle-class Americans pay a higher share of their income in taxes than than some millionaires and billionaires. … I’m not the first President to call for this idea that everybody has got to do their fair share. … Ronald Reagan was calling for then is the same thing that we’re calling for now: a return to basic fairness and responsibility; everybody doing their part. And if it will help convince folks in Congress to make the right choice, we could call it the Reagan Rule instead of the Buffett Rule.
First of all, it is just plain false that “middle-class Americans pay a higher share of their income in taxes” than millionaires and billionaires. According to the Congressional Budget Office, middle-class Americans pay an average 3.3 percent effective tax rate on their income. The top one percent of Americans, which includes those making $350,000 and above, pay an average effective rate of 19 percent.
But maybe Obama misspoke. Maybe he meant to include all federal taxes, including payroll and death taxes, in his calculation. Even then, however, Obama’s statement falls short. Middle-class Americans pay an average effective rate of 14.3 percent on all federal taxes. The rate for the top one percent? 29.5 percent.
The reality is that the United States already has one of the most progressive tax system in the world. The top 20 percent of Americans already pay 68.9 percent of all federal taxes. And while the top one percent of Americans do earn 19.4 percent of all income, they also pay 28.1 percent of all federal taxes and 39.5 percent of all federal income taxes. How is that not their “fair share”?
Yes, some millionaires do game the system. And as Reagan rightly pointed out in his 1985 Address to the Nation on Tax Reform, this does undermine trust in government. But Reagan’s solution to this problem was the exact opposite of Obama’s. “We’re reducing tax rates by simplifying the complex system of special provisions that favor some at the expense of others,” Reagan said.
And that is exactly what Reagan’s tax reform did. It eliminated hundreds of loopholes, cut the number of tax brackets from 15 to two, and slashed the top income tax rate from 50 percent to 28 percent. The Buffett Rule does the reverse. It further complicates the tax code by creating a special new provision which will both further distort economic incentives and raise tax rates. The Buffett Rule does not eliminate a single loophole. Instead, all it does is create a new Alternative Minimum Tax complication that, as The Washington Post’s Ezra Klein notes, doesn’t even guarantee that millionaires will pay the same rate as middle-class tax payers.
More importantly, Reagan pursued tax reform to decrease the power and scope of the federal government. Pitching his plan in Atlanta in 1985 he said:
We want the part of your check that shows Federal withholding to have fewer digits on it. And we want the part that shows your salary to have more digits on it. … Maybe you’ll take some of the money and put it in the bank. Fine. … Maybe you’ll spend it. And that’s fine, too. … But whatever you do with it, you’ll be the one who’s doing the doing. You’ll make the decisions. You’ll have the autonomy. And that’s what freedom is.