73%–Just the Beginning for Obama

Just how radical? Well, Team Obama drops a pretty big hint in the briefing document it produced about the Buffett Rule. In section V of the document — titled “The Economic Argument for the Buffett Rule — the report starts off immediately by favorably citing this piece of evidence:

In a recent paper, Nobel-Prize winning economic Peter Diamond and renowned tax economist Emmanuel Saez note the relatively greater ability of high income taxpayers to avoid taxes, and argue that “the natural policy response should be to close tax avoidance opportunities” (Journal of Economic Perspectives, Fall 2001).

Oh, but that Diamond-Saez study the White House likes so much — “The Case for a Progressive Tax:From Basic Research to Policy Recommendations” — says so much more.  In fact, what the study is best known for is its stunning conclusion — much talked about in liberal policymaking circles — that the “optimal tax rate” is “73 percent, substantially higher than the current 42.5 percent top U.S. marginal tax rate (combining all taxes).”

73%! The top U.S. tax rate hasn’t been that high since 1969. It was 70 percent when Ronald Reagan took office in 1981 and cut taxes across the board, helping launch a 25-year economic boom after the stagflation-ridden 1970s. (And other research by Saez suggest the top tax rate should be 83%, back where it was in the 1940s.)

But it is interesting to note, especially in light of the White House’s embrace of the Diamond-Saez research, that Obama himself doesn’t think too much of those Reagan tax cuts. As Obama wrote in The Audacity of Hope: “The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest … but they did lead to a wasteful industry of setting up tax shelters.”

So the only downside of 70% tax rate to Obama was excessive tax planning, not a huge disincentive to working, saving and investing?

Indeed, Obama made it clear in his Osawatomie, Kansas speech last December that America’s three-decade economic experiment in enhanced economic freedom—lower tax rates, less regulation, freer trade—has been a failure. Indeed, Obama said in that speech that although the “theory fits well on a bumper sticker … it has never worked.” Reagan and Clinton blew it. (Tax cutting JFK, too, apparently.) Time for a different formula. Time to raise taxes and create more rules for business with a goal of “shared prosperity and shared responsibility.”

But Operation: Reverse Reagan is already under way. In additional to cutting marginal tax rates, Reagan indexed tax brackets to inflation, stopping the automatic, inflation-induced tax hikes that were so notorious in the ’70s. But as AEIeconomist  Jim Capretta points out, the Obamacare tax hikes associated with Medicare — 0.9% on wages and 3.8% on non-wage income — are not indexed for inflation. While they will start out only hitting  high-income taxpayers ( individual with incomes exceeding $200,000 and couples with incomes above $250,000),  ever year they will affect more and more Americans, rich and middle-income alike. Bracket creep is back.

And don’t forget about the tax hike plans of liberal House members. Their recent “Budget for All” proposal would a0 allow the top-end Bush tax cuts to expire, b) create five new tax brackets — 45%, 46%, 47%, 48%, and 49% — for “millionaires and billionaires, c) slap a European-style wealth tax of 0.5% on fortunes of $10 million or more, d)  raise income taxes on the broad middle by allowing the “28% and 25% brackets to sunset once the economy is on solid footing, in 2017 and 2019, respectively.” That means higher taxes on families making over $70,000 a year.

The Buffett Rule? It would be just the beginning for Obama.