The ‘fair share’ myth

Joseph F. Petros III Former Executive Editor, Notre Dame Journal of Law, Ethics & Public Policy
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If President Obama is re-elected in November, it will be for one reason: the American people believe that the rich are not paying as big a percentage of their income in taxes as everyone else.

That will be a sad day, for America will have elected its leader based on a premise that is entirely false.

The president has deliberately framed his tax argument in terms of fairness, demanding that the rich simply pay their “fair share” and that Warren Buffett not be allowed a lower effective tax rate than his secretary. Republicans can learn a lot from what the president is saying. Indeed, the president’s rhetoric on taxes tells us a lot more about the American people than does the substance of his policies.

The American people want what President Obama preaches: fairness. Fairness is a fundamental American principle, and it still controls Americans’ moral compasses to this day. Americans believe that everyone should be equal before the law — but not necessarily equal in wealth. On the whole, Americans also believe that everyone is entitled to keep the fruits of his labor. Calls to penalize the wealthy or to redistribute income generally do not play well in America, and the president knows it. That is why the president cannot run on the true substance of his proposals, which demand that the rich contribute much more of their income than everyone else.

In order to win over the electorate, the president must convince Americans that the rich are benefiting from an unfair tax system — that they are currently paying a smaller percentage of their income than everyone else. So far, he has done a darn good job. He has taken advantage of the complexity of the tax code to mislead the American people on a subject they do not fully understand, and few in the Republican ranks have directly called him out on it.

Take the president’s assertion that, because of the lower tax rates on dividends and capital gains compared to most regular income rates, many wealthy people like Warren Buffett and Mitt Romney only pay an effective rate of 15% on their income, almost all of which comes from investments. This makes for a great talking point — but it is extremely misleading. The reason dividends and capital gains are taxed at a lower rate is because most of that income has already been taxed at the exorbitantly high corporate rate of 35%. Those corporate taxes do not show up on individual tax returns, but they are nevertheless taxes on shareholders’ investment income. When you combine the 35% tax on income at the corporate level with the additional 15% tax when that income is distributed to shareholders as either dividends or capital gains, the result is that investors are actually forking over about 44.75% of their investment income to the federal government.

If Republican candidates, presidential and congressional, want to gain any traction with the electorate this year, they must address this fairness myth head on. It is not sufficient to simply argue that increasing taxes on the wealthy will inhibit economic growth. By confining their response to this, Republicans are conceding the fairness issue to the president. Republicans should — and must — own the fairness argument.

Republicans should call the president’s bluff and propose a plan for tax reform that truly is fair. Here’s an idea: raise the rates on dividends and capital gains to parallel the regular income rates, but totally eliminate the corporate tax. Not only would this be good politics, but it would make perfect sense. It only makes sense to tax income when it is distributed to individuals because only individuals can consume and enjoy income. I can’t say that I’ve ever seen a corporation eating out at a restaurant or taking in a movie. Corporate income is either put back into the business for business purposes or distributed to individual shareholders, who in turn enjoy the fruits of their investments.

Eliminating the corporate tax would also help solve another of the Democrats’ common gripes: that corporations are making large profits but refusing to use those profits to create jobs. It would give corporations a huge incentive to reinvest their profits in further growth, and it would give investors a reason to prefer long-term investment over short-term payoff.

Combine this proposal with an overall flattening of income rates and an elimination of loopholes, and Republicans will have a winning argument in 2012. It is no coincidence that candidates have been most successful this election season when they have talked about true tax reform (remember 9-9-9 fever?). Americans are craving for fairness, simplicity and honesty when it comes to tax policy. Republicans must stop cowering in the shadow of the president’s “fair share” rhetoric and take the time to explain the truth to the American people.

The president cannot be allowed to win re-election based on a false premise. That, in fact, would be unfair.

Joseph Petros is an associate at the law firm of Warren and Young PLL in Ashtabula, Ohio. He is a graduate of the University of Notre Dame and the University of Notre Dame Law School, where he served as executive editor of the Notre Dame Journal of Law, Ethics & Public Policy.