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Right Turn
Posted at 08:30 AM ET, 08/20/2012

Obama’s tax fantasy

The amount of rhetorical nonsense and plain factual error floating around on taxes these days is rather stunning.

Let’s start with Mitt Romney’s taxes. If we accept that a public figure with his exposure and desire for political advancement paid every dollar that was owed in taxes ( i.e. he’s not a tax felon) what difference does it make what percentage of his income was taxed at 15 percent (for capital gains and dividends) and what percentage as ordinary income? Was he supposed to pay more than was owed?

This is not even a matter of tax policy. Romney has said that he wants to abolish capital gains, dividends and interest for those making less than $200,000.

So then let’s talk about the current tax system and what President Obama has in mind.

As the American Enterprise Institute explains, “Dividend taxes were lowered in May 2003 to reduce the tax penalty on investment, especially stock-financed investment.” In other words, under the 2001 Bush tax cuts, dividends were taxed for upper income earners at 35 percent; in 2003 that went to 15 percent. The thinking was that corporations were sitting on piles of cash and the rate was lowered to encourage payment of dividends and spur investment. It was also an effort to make U.S. corporations more competitive since other countries corporate profits at a much lower rate.

When Warren Buffett says he only pays tax on 15 percent of his dividend income — and then the media echo this — the public is being conned. Under the current system $1 million in corporate profits is taxed at 35 %. That leaves $650,000 to be distributed as dividends. The $650,000 under the current rate is taxed at 15 percent ($97,500). In other words, on the $1 million the government gets $447,500. In short the money Buffet is referring to is not taxed at 15 percent; it’s taxed at 44.7 percent.

Now consider what President Obama has in mind. He wants to tax dividends at the individual tax rate, and to raise that rate to 39.6 percent. He then would add on the Obamacare tax (3.8 percent) for a grand total of 43. 4 percent. On the corporate tax side, he’d take the rate from 35 percent to 28 percent. So, that dividend money would be taxed at a total of approximately 59 percent (applying the 28 percent corporate tax and then the 43.4 percent individual rate to the remainder). In short, Obama wants to take nearly 6 of every 10 cents earned by corporations. That is an increase in the tax burden of about 1/3.

This would be economic madness. Corporations (even if Obama forces them to pay a minimal tax for monies that are never repatriated) would have even less incentive to bring overseas earnings home. And, our corporations would become less, not more, competitive around the world.

Surely someone in the Obama White House understands this, even if Obama has no clue what his proposals actually entail. The operation of our tax code and the impact on jobs, investment and growth are seemingly immaterial to this crowd. They want to win the votes of Obama’s core constituencies with the fantasy that taxing the “rich” and “corporations” (which must employ and grow to sustain our economy) is “fair” and will improve our economic situation.

After Romney gets through with the whiteboard on Medicare, he should start explaining the tax code to voters. They’ll be stunned to learn how economically illiterate is our president.

By  |  08:30 AM ET, 08/20/2012

Categories:  2012 campaign, Taxes

 
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