To further penalize high earners, Obama’s budget talks about a “Buffett rule,” under which no household at the top should “pay a smaller share of its income in taxes than middle-class families pay.” But IRS data show that high earners already pay an effective income tax rate of about 25 percent on average, which is far more than the average rate on middle-class families of less than 10 percent.
So I’ve got a better idea for a Buffett rule — no one should pay a larger share of their income in taxes than Warren Buffett does. In a recent interview, Buffett said that he paid 17 percent. That rate would be a good target for tax reform since it’s the same rate as the flat tax proposed by former House Majority Leader Dick Armey.
Perhaps you are thinking that while Obama adds special breaks to the tax code and hikes individual tax rates, he at least gets rid of loopholes that cause corporations to “ship jobs overseas.” Actually, the 11 provisions in Obama’s budget that penalize corporate foreign income would hurt the U.S. economy, not help it. That’s because the foreign operations of U.S. companies mainly complement their domestic operations, not undermine them. Many of Obama’s foreign income provisions would make the tax code more complex, and they move in the opposite direction of the efficient territorial systems that most of our trading partners have.
Besides, it is America’s uniquely high 40 percent corporate tax rate that encourages businesses to invest abroad. To the president’s credit, he has proposed a 7-point reduction in the corporate tax rate. But even with a federal-state corporate tax rate of 33 percent, we would still be far above the 25 percent average rate of nations in the Organization for Economic Cooperation and Development.
In sum, the president’s rhetoric about tax reform is at odds with the reality of his own proposals. While Obama’s proposals would trim the corporate rate, they would also give us more loopholes, more complexity and higher individual rates. The budget says that the “tax code has become increasingly complicated and unfair.” That’s right, and President Obama’s proposals would make it worse.
Chris Edwards of director of tax policy studies at the Cato Institute and editor of www.DownsizingGovernment.org.