Links:

The Obama Rule              

He says taxation is about fairness, not growth or revenue.

This was long apparent to those fated to closely watch the 2008 campaign, but some voters might have missed the point amid the gauzy rhetoric about hope and change. Now we know without any doubt. White House aides made it official Tuesday in their on-the-record briefing on the new federal minimum tax that travels under the political alias known as the "Buffett rule."

The policy goal is to impose an effective minimum tax of 30% on the income of anyone who makes more than $1 million a year.  When President Obama first proposed this new minimum tax he declared that the rule "could raise enough money" so that we "stabilize our debt and deficits for the next decade."

Then he added: "This is not politics; this is math." Well, remedial math maybe.

The Obama Treasury's own numbers confirm that the tax would raise at most $5 billion a year—or less than 0.5% of the $1.2 trillion fiscal 2012 budget deficit and over the next decade a mere 0.1% of the $45.43 trillion the federal government will spend. 

Okay. So what is the point?

President Obama speaking on the economy at Florida Atlantic University on Tuesday in Boca Raton, Fla.

The goal, Mr. Furman explained, is to establish a "a basic issue of tax fairness." Millionaires should pay an effective tax rate no lower than a middle-class secretary or a plumber. But wait: IRS data show that middle-class workers on average pay just under 15% of their income in federal taxes, while the richest 0.1% pay almost twice as high a rate on average, or 26%.

The U.S. already has a Buffett rule. The Alternative Minimum Tax that first became law in 1969 was also supposed to make sure that millionaires pay their "fair share." The top AMT rate is now 28%. But the AMT has become a public nuisance, adding new complexity to the tax code and ensnaring more and more middle-class families because it isn't indexed for inflation. The surest prediction in politics is that any tax that starts by hitting the rich ends up hitting the middle class because that is where the real money is.

An even greater absurdity is the White House claim that this is a first step to tax reform because it will ensure that the "rich don't take advantage of tax breaks or structure their affairs to pay less taxes." Huh?

A basic principle of any tax reform worth the name is to broaden the tax base in order to lower rates for everyone, not to raise them. The point is to make the tax code more efficient by reducing the incentive for avoidance—legal or illegal.

Want to guess how long it will take for the suits on K Street to get busy trying to reinsert tax breaks for "investments" in the likes of municipal bonds, mortgages, energy-efficient toasters, windmills or by Chuck Schumer's hedge-fund buddies?

The century-long history of the federal income tax teaches us one lesson over and over: The higher the tax rates, the more loopholes Congress inserts as a way around those rates. This is why the government collected roughly as much tax revenue as a share of GDP when the top tax rate was 70% in the 1970s as it did when the rate fell to 28% in 1986.

The only investment and hiring the Buffett rule is likely to spur will be outside the United States—in China, Germany, India, and other competitors with much more investment-friendly tax regimes. The Buffett rule would give the U.S. the fourth highest capital gains rate among OECD nations, according to a new study by Ernst & Young, to go along with what is now the highest corporate tax rate (a little under 40% for the combined federal and average state rate). That's what happens when politicians pursue fairness over growth.