Obama's New Millionaires Tax

According to news reports today, president Obama is going to ask Congress to pass a new tax that will insure that millionaires pay higher taxes so that their tax rate will not be any lower than the average middle class tax rate. It is an idea that has great appeal when one only hears a general description of the idea. A closer investigation reveals, however, that it is a truly idiotic idea that is destined to fail.

First, there already is a tax that was designed to make sure that the rich pay their fair share. It is called the Alternative Minimum Tax and it was passed over 30 years ago and modified repeatedly since then. When the AMT went into effect, it was supposed to hit a few dozen very wealthy people who paid no taxes due to extensive use of tax shelters and deductions. It was a plan to make the millionaires pay their fair share. Of course, over the years since then, the tax has come to take in more and more of the population. Right now it hits single people who earn more than $112,500 dollars and married couples that make over $150,000. Just to be clear, these figures are for the gross income of the taxpayers, not the amount left after deductions. In other words, tens of millions of taxpayers are now ensnared by the AMT. As a result, Congress has passed a series of temporary annual or two year changes raising the level at which the AMT kicks in. There is now talk that the AMT has to be cancelled since it is applied in such a haphazard way.

It is reasonable to expect that the experience with the AMT would be repeated in any new millionaires tax. It may hit the super rich today, but in a few years, the upper middle class will be captured as well.

Second, there has been a consensus in this country that lower rates on capital gains and dividends encourages investment and economic growth. The main reason that millionaires like Warren Buffet pay reduced tax rates is that most of their income is capital gains and dividends. Passing a millionaires tax would undo much of the benefit received by the economy when the rates on capital gains and dividends were cut. It makes no sense to undo the stimulus given to the economy at a time of high unemployment.

Third, we already have only half of the taxpayers in the country paying income taxes. That means that the median taxpayer is paying next to nothing. Obama may not like the rates at which the super rich are paying taxes, but they are still paying the bulk of all that is collected. It is really not fair to add more on top of that.

Fourth, this tax plan has no chance whatsoever of passing. It is already being opposed by Democrats who do not want to impose big new taxes during a shaky economic time. Add these to the GOP and Obama's plan is dead on arrival. Indeed, Obama obviously does not care whether or not his plan passes. All that he is interested in is getting an issue for his re-election campaign. It would be nice to have a president who put the country and its welfare ahead of his own re-election campaign. Maybe if Obama loses, we can get such a president starting in 2013.