The long-term fiscal picture of the U.S. government is all kinds of crazy—that seems to be the one thing everyone in Washington can agree to. A full examination of every budgetary delusion, fantasy and mania would require a tome the size of the Bible, so for now I want to look at just one madness: The Democratic obsession with the top marginal income tax rate.
President Obama’s speech on deficit reduction last week was the latest example. Much of his text was devoted to an obsessive discussion of “tax cuts for millionaires and billionaires” who “can afford to pay a little more.” What he was talking about, primarily, was the Bush-era tax code that reduced the top marginal rate from just less than 40% to 35%.
For Obama and the Democrats, this reduction is the root of all our budget woes, and restoring the top rate to Clinton-era levels will put us on the path to fiscal sanity.
Why is this crazy? Because the top marginal rate is just one button on the big and complicated dashboard by which we steer the ungainly budget. Not a very important button, either, to people who are not obsessed with it.
Tax rates are just one aspect of a monstrously complex tax code in which no one but a fool pays list price. The rate is like the sticker on the window of a new car—it’s where the haggling starts. For example, the rate on the lowest income earners is a theoretical 10 percent, but few of them pay any income tax at all once they have claimed their available exemptions and credits.
Millionaires and billionaires have all sorts of ways to cut the amount of personal income they declare in a given year, a maze of deductions, shelters, exemptions, credits, depreciations, and off-shore havens. They forego income and sell stocks or real estate or gold bars to fund their yacht-buying sprees, then pay the capital gains tax instead of income tax. If need be, they can park their money in tax-favored bonds and wait for a Republican president.
This highly gameable system explains why Obama’s own deficit reduction commission advised the President to get over his obsession and focus instead on streamlining the tax code. By closing loopholes and trimming deductions, the commission rightly observed, the government could actually reduce marginal rates while still increasing tax revenue.
The President gestured in this direction when he talked about “limiting itemized deductions for the wealthiest 2 percent of Americans—a reform that would reduce the deficit by $320 billion over 10 years.” He also called for a “fair and simple” tax code. In other words, he wants it all, the whole enchilada: the magical marginal rate plus an end to the loopholes. As long as the Republicans are part of the equation, there is no chance that he’ll get both.
The rate obsession also obscures another step toward fiscal sanity. We’re focused on taking more money from rich people when we ought to be focused on giving them less. The federal budget is a gravy train for rich people. Start with Medicare, the No. 1 long-term budget buster. It’s a hugely expensive program for retirees—and retirees are, demographically speaking, the richest segment of the American population. Obama and the Democrats love to talk about Medicare as a safety net, but in fact it is an umbrella that shelters the rich as well as the poor.
When the Pentagon buys weapons or computers or truck parts, the money goes to companies owned by rich people. When farmers get their egregious subsidies, who laughs all the way to the bank? Millionaires and billionaires. There’s a reason Washington, D.C. is home to more than 35,000 lobbyists. And who is hiring those lobbyists? I’ll give you a hint: Not poor people.
What Obama’s speech made clear is that he wants to transform the deficit debate—and the 2012 election—into a symbolic argument about a puny issue, the top marginal income tax rate. He knows Republicans can’t embrace a higher top rate and live to tell the tale, and apparently he believes that this will let him drive a wedge between the GOP and the middle class.
This might be good politics; we’ll see. But by doing so, the President risks missing a chance at significant progress: a better, simpler tax code and a body blow to special interests. That’s nuts.