Freedomnomics

Article published Monday, September 19, 2011 at Fox News.

Obama Gets the Numbers Wrong In His Tax Plan!

By John R. Lott, Jr.

The justification for President Obama's new proposed tax on the wealthy is wrong on the numbers. Despite the president's claims, millionaires don't pay lower tax rates than middle class workers. His proposed surcharge on capital gains and dividend taxes will raise already high tax rates on high income individuals and force even more investment outside the United States. The so-called "Buffett rule" is based on Warren Buffett's claim:

"The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

It is true that the 15 percent capital gains and dividend tax rates are lower than the marginal income tax rate paid by a lot of workers. Of course, this ignores that because of deductions the average tax rate for the middle class is much lower than the marginal rate.

But much more importantly, Buffett's claim ignores why the capital gains and dividend tax rates are set at the level they are: corporate income has already been taxed once when the company earned it. In the United States the combined federal and state corporate tax rate is 40 percent, the highest rate in the world.

So let's take a simple example. Suppose Warren Buffet invests his money in a company and that company earns $1. The company pays 40 cents in income taxes. If the remaining 60 cents is paid as a dividend, the 15 percent dividend tax rate leaves the stockholder with 51 cents, for a combined effective tax rate of 49 percent. The analysis is the same if the company keeps the money, raising the value of the company stock, and creating a capital gain. The rate would be higher if there is a state income tax.

Mr. Buffett's secretary in Nebraska simply doesn't pay a 49 percent marginal income tax rate. When President Obama addressed Congress on September 8, he claimed that his proposals didn't amount to "class warfare." Of course, the president then went on to claim that the wealthy aren't paying their "fair share" of the taxes.

But the wealthy are already bearing a much larger share of taxes than their share of income. For example, the top 1% of Americans in terms of earning might account for 20% of total income, but they already pay 38% of income taxes. By contrast, the bottom 75 percent of workers make 33 percent of total income and pay only 13.7 percent of income taxes.

Possibly the president can make the case that high income Americans should pay even more in taxes. But falsely claiming that they are paying lower tax rates than they are isn't the way to do it.

John R. Lott Jr. is a FOXNews.com contributor. He is an economist and the author of "More Guns, Less Crime (University of Chicago Press, 2010), the third edition of which was published in May.".

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