Election 2012: Debunking the Top 10 Economic Myths From Obama
Editor’s Note: This is the second of a three part series debunking the economic myths of the 2012 Obama campaign. To read the first part, click here.
“I have never understood why it is ‘greed’ to want to keep the money you’ve earned but not greed to want to take somebody else’s money.” – Thomas Sowell, 1999
3. “The wealthy aren’t paying their fair share.” – 7/25/11
Throughout his administration, President Obama has claimed that the wealthy “aren’t paying their fair share” in taxes and has repeatedly used examples like Warren Buffett’s and his 2012 election opponent Mitt Romney’s tax returns. The claim is that the richest 1% in America is paying less in taxes than the middle class.
This is a blatant lie. According to the non-partisan Congressional Budget Office (CBO), the actual amount paid in taxes by the wealthy is higher than it was before the recession while the effective income tax rate of the richest 1% is 29.5% when including all federal taxes, or about twice the 15.1% paid by middle class families.
Like Buffett, Romney makes most of his money from investments, not wages or salary. Thus his income is really taxed twice: once at the corporate tax rate of 35%, then again at a 15% tax rate when it is passed through to him as dividends or via capital gains from the sale of stock. The marginal tax rate on every additional dollar of capital gains and dividend income from corporate profits can reach as high as 44.75% at the federal level (assuming a company pays the 35% top corporate rate), not 15%.
On top of that, the CBO states the richest 20% of Americans (averaging $273K in pre-tax income, or what is considered to be “rich” according to Obama) pay 68% of the federal tax burden, while the bottom 20% of earners paid just three-tenths of a percent of the total tax burden.
So in other words, 1 in 5 American households pay almost 70% of all taxes collected in this country, and that’s “not fair”? They should be paying more? Clearly we have completely different interpretations of what “fair” means.
4. “Bush tax cuts led to the economic crisis.” – 9/27/12
The Washington Post gave this one three Pinocchios. I already explained what truly caused the 2008 recession in Part 1 of this series. But President Obama and Vice President Joe Biden have repeatedly called for a “balanced approach” of tax hikes and spending cuts (without following up with any action) to reduce Washington’s record trillion dollar deficits and $16 trillion debt, assuming higher tax rates lead to higher revenues.
While “balanced approach” sounds good at face value and higher tax rates make sense in theory, both ignore the realities of the problem.
What’s actually leading to the bleeding of red ink in Washington is out of control spending. Over the last 50 years, federal revenues (taxes) as a percentage of GDP have fluctuated anywhere from 15-20%, with the all-time high being at 20% by the end of the Clinton administration, and the Bush administration lowering it back down to 16.3% by the end of its term. But federal spending as a percentage of GDP has ballooned from its historic rate of 20% to 26% today. In other words, we’re taxing less and spending way more.
So Obama-Biden is advocating returning tax levels on only the rich back to the Clinton era. Fine. According to the liberal Center on Budget and Policy Priorities (CBPP), allowing the Bush tax cuts to expire on the rich would bring in $829 billion extra revenue over the next decade. Last year’s budget deficit alone was $1.6 trillion. So in other words, what raising taxes on only the rich would bring in over 10 years would only cover 6 months worth of deficit spending. Then what?
In fact, the non-partisan CBO projects that Obama’s budgets will incur $9.5 trillion worth of deficits over that same time period. So raising tax rates on the rich will only cover 8.7% of deficit spending over the next 10 years. And how do we cover the other 91.3% of debt over that same period?
“Balanced approach” is being generous. More like 10% tax hikes on the rich and 90% spending cuts, which most politicians running for office won’t admit and many voters don’t like to hear.
Now as far as what actually leads to higher revenues, there’s a strong case to be made that pro-growth tax reform works better. Pro-growth tax reform, as illustrated in the bipartisan 1986 Tax Reform Act, closes loopholes that allow for overseas tax shelters as well as special interest subsidies in order to collect revenue more efficiently while cutting tax rates across the board at the same time to incentivize businesses to keep money and jobs here instead of overseas, thus broadening the tax base.
Raising taxes on only the rich is a futile effort. The highest tax bracket income earners, when compared with those people in lower tax brackets, are far more capable of changing their taxable income by hiring attorneys, accountants, banking services, etc. They can change the location, timing, composition, and volume of income to avoid taxation.
If you need proof, look across the Atlantic. Last year, Britain decided to raise its top tax rates all the way to 50%. The first revenue returns came in for the government earlier this year, and the revenues have plunged. Not quite the desired effect. Even back in the U.S., California is learning the hard way that soaking the rich isn’t working out so well, seeing a nearly 22% decline in revenues after raising income tax rates.
Canada, however, has lowered their corporate tax rate from 22% in 2006 to 15% in 2012 and taxes their richest bracket at 29% vs. the U.S.’s 35%. Now the average Canadian household is richer than the average American household for the first time in history.
Apparently, according to the progressive elites, what happens in real life can’t possibly work in theory.
5. “Governor Romney’s plan would effectively raise taxes on middle class families with children by an average of $2,000 to pay for this tax cut. It’s like Robin Hood in reverse. It’s Romney Hood.” – 8/6/12
The charge is that even though Romney is proposing to cut tax rates for everybody across the board, Romney will finance this by imposing a tax increase on the middle class. His evidence is a single study by the Tax Policy Center, a liberal think tank that has long opposed cutting income tax rates.
The Tax Policy Center uses the headline-grabbing opinion that it is “mathematically impossible” to reduce tax rates and close loopholes in a way that raises the same amount of revenue. They then postulate that Romney would have to do something he hasn’t proposed: raise taxes on those earning less than $200,000. In the Obama campaign’s political alchemy, this becomes “Romney Hood” and a $2,000 tax increase.
For starters, the author of the study in question, TPC Director Donald Marron, has gone on record saying the Obama campaign has misrepresented the findings of his study, stating, “I don’t interpret this as evidence that Governor Romney wants to increase taxes on the middle class in order to cut taxes for the rich, as an Obama campaign ad claimed.”
Second, six other studies have proven the Obama campaign’s claim to be false, including from the American Enterprise Institute (AEI), three professors from Columbia, Harvard, and Stanford, the Wall Street Journal, the chairman of Harvard’s economics department, a Princeton economics professor, and the Tax Foundation.
Third, Obama and Biden ignore the history of tax cutting. Every major marginal rate income tax cut of the last 50 years — 1964, 1981, 1986 and 2003 — was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code — i.e., the share of taxes paid by the richest 1% rose.
For example, from 1980 to 2007, three tax rate cuts brought the highest marginal tax rate to from 70% to 35%. Internal Revenue Service data shows that when the tax rate was 70%, the richest 1% paid 18% of all federal income taxes. With the rate down to 35% in 2008, the share of taxes paid by the rich more than doubled to 40%.
Lastly, the Obama campaign’s claim that it’s impossible to make the numbers add up is also refuted by Obama’s own Simpson-Bowles debt commission report. The Romney plan of cutting the top tax rate to 28% and closing loopholes to pay for it is conceptually very close to what Simpson-Bowles recommended.
6. “I can make a firm pledge, under my plan, no family making less than $250,000 a year will see any form of tax increase.” – 2/4/09
He’s already broken that pledge. According to the non-partisan CBO, 75% of the taxes to be collected on Obamacare from the individual mandate will come from those making under $120,000 a year. Quite a different story from what the President told us when he said health care should never be purchased with tax increases on middle class families or even when he claimed Obamacare wasn’t a tax at all.
Also, starting January 1, 2013, Americans will face a $494 billion tax increase, the highest ever in one year. Congressional aides are calling it “Taxmageddon” — a chilling reference fit for an economic nightmare. Federal Reserve Chairman Ben Bernanke has warned that it will be a “massive fiscal cliff” for the economy. Taxmageddon falls primarily on middle- and low-income Americans. That’s because, contrary to the president’s rhetoric about “the wealthiest Americans,” 60% of the Bush tax cuts went to middle- and low-income taxpayers. Almost 34% of the tax increases from Taxmageddon come from the expiration of the 2001 and 2003 Bush tax cuts. Another 25% comes from the expiration of the payroll tax cut. Most of the remaining increases come from Obamacare.