President Obama's Animus Toward Success

Originally Posted At Forbes.com
By Lawrence A. Hunter, Ph.D.
February 5, 2012

In his infamous Osawatomie, Kansas speech in December, President Obama stood reality on its head when he said we already had tried relying on a strategy of unbridled capitalism, low tax rates and deregulated markets, and it had failed.  In fact, we haven't tried it for a century now, and it worked when we did. 

He went on to blame our current economic woes on the Bush tax cuts specifically, which he implied went disproportionately to upper-income earners and starved the government of revenue that it otherwise could have used to create jobs and improve the economy:

“I mean, understand, it's not as if we haven't tried this [free-market] theory. Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did they get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the. . .[Keynesian stimulus and the welfare state].”

The most recently available IRS data (2009) tell a different story altogether. (See Chart 1) The Bush tax cuts went disproportionately to people earning less than $250,000 a year. As a group, the 8,274 tax returns reporting Adjusted Gross Income (AGI) of $10 million or more paid an average effective tax rate of 22.6 percent in 2009, down from 25.4 percent in 2000.  That’s a reduction in their effective tax rate of 11 percent under the Bush tax code, far less than the Bush tax cuts for middle and lower-income taxpayers. As Chart 1 shows, people reporting AGI between $5,000 and $25,000 received a tax cut of more than 40 percent; between $25,000 and $250,000 more than 30 percent; and those showing adjusted gross income of more than $500,000, between only 12 and 14 percent.


The Bush tax cuts are a straw man.  People earning more than a million dollars a year still pay an average effective tax rate (25 percent) that is almost five times greater than the average effective tax rate (5.2 percent) paid by returns reporting income of less than $100,000.

But President Obama wasn’t content just to imply that the Bush tax cuts were designed to benefit only the rich, nor did he stop at claiming they caused and prolong economic distress; he went on to distort the truth so much as to create a false reality about the entire tax code:

“Some billionaires have a tax rate as low as 1 percent — 1 percent. That is the height of unfairness.”

So now, President Obama has called on Congress to raise taxes somewhere between 17.5 percent and 33 percent (depending upon the final details of the Obama plan) on everyone earning more than $250,000.  Depending on the exact details of the plan, that would leave taxpayers earning between $250,000 and a million dollars paying somewhere between 24 percent and 29 percent and those earning more than $1 million paying 30 percent.  (See Chart 2)


If every taxpayer earning more than $1 million was put under Obama’s 30-percent, minimum-tax rule, it would generate a maximum of only about $39 billion new revenues a year on a purely static basis, which requires assuming unrealistically that they all take no action to mitigate their increased tax liability. This is chump change for the federal government (3.0 percent of the annual deficit) and a clear indication that Mr. Obama’s proposal to increase the progressivity of the already highly progressive federal income tax (See Chart 2) is motivated more by animus toward those at the top of the economic ladder than by the deficit, concern for the economy or compassion for those at the bottom trying to get a leg up the ladder.

When pressed to provide details on the implication that billionaires routinely pay less than one percent of their income in taxes, the Obama White House could provide nothing except a video clip of a Bloomberg TV segment and a report by the left-wing website Think Progress in which reporter Gigi Stone makes the routine deferral of capital gains taxes appear sinister and immoral in a brazen play to justify taxing unrealized gains.  The Internal Revenue Code does not tax paper profits before they are actually realized; the appreciation in the value of stock is taxed only after the stock is sold and the capital gain actually realized. Borrowing against assets, which is essentially the strategy Ms Stone condemns, is routine, and loan proceeds are not taxed under the current income tax.



The methods the super rich use to defer paying capital gains taxes, such as variable pre-paid forward contracts (PVFs), are perfectly legal tax-reduction strategies available to anyone.  They actually diminish the economic damage caused by lock-in of capital gains realizations by unfreezing capital and increasing investment. The PVF allows the investor to receive an up-front payment (typically, 75-85% market value) in exchange for delivery of a variable amount of shares or cash in the future, at which time the capital gain is realized for tax purposes and the tax on the capital gain is paid.  The IRS recently restricted how long PVFs could be used to defer capital gains so Mr. Obama’s premising changes in the Internal Revenue Code on the way such tax-deferral strategies worked in the past is unjustified. 

Past experience with raising the marginal tax rate on capital gains to anywhere near 30 percent (even under the guise of a “minimum tax”)—which is what would be necessary to push the effective tax rate of billionaires up to 30 percent—ensures that far from raising even that pittance of revenue, capital gains realizations would plummet and the revenue would collapse, along with investment and economic growth.  For example, when the top tax rate on capital gains was raised from 20 percent to 28 percent in the 1986 faux “tax reform,” capital gains realizations collapsed from 4.08 percent of GDP in 1985 to 1.86 percent in 1991 and remained depressed below the 1985 level until the capital gains tax rate was reduced again to 20 percent in 1997.  After that, realizations began to rise, and the top capital gains tax rate was reduced again in 2003 to 15 percent.  By 2007, realizations had risen to 6.56 percent of GDP, more than 3 ½ times the nadir to which they were driven by “tax reform.” 

At each turning in the capital-gains saga, government revenue estimators over-estimated realizations and revenues when the tax rate was raised and under-estimated realizations and revenues when the tax rate was lowered.  As Jack Kemp was fond of saying, there is one demonstrable way to “soak the rich:” Lower their tax rates.  Lower tax rates always unlock capital and stimulate entrepreneurial risk taking, which spurs economic growth and job creation.

One can be sure tax lawyers will discover new techniques to defer taxable income, which is a reflection of what always happens under a progressive income tax despite efforts of the tax police to curtail it.  The fact that the strategies are worth more to the wealthy than lower-income individuals is simply a reflection of reality—the rich have more capital gains to tax.  The only way around this simple fact is to discard any notion of non-discriminatory taxation and equal treatment under the law and design the tax code as a punitive instrument to redistribute income. That’s not the rule of law; it is arbitrary and capricious, the rule of expedience, the rule of the gun.

How much more progressive does the President want to make the income tax?  The bottom half of all returns already pays a mere 2.3 percent of their AGI in taxes, and revenue from them accounts for only 2.25 percent of all federal income tax revenue.  Those returns between the bottom 50 percent and the top 25 percent pay an average effective tax rate of only 5.6 percent, accounting for only 11.8 percent of all federal income tax revenue.  Combined, the bottom 75 percent of all returns together pays only 13 percent of all federal income taxes.

The facts indicate that President Obama holds a poisonous animus toward success.  Sadly, it appears he wants to vitiate any remnants of the rule of law in the tax code by circling around to the bottom of the tax form and rescinding all the rules of the game after the fact if they result in anyone paying less than 30 percent, a tax rate even the liberals’ sainted John Maynard Keynes found unbearable and counter productive.

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