Barack Obama is proposing new rules to ensure U.S. millionaires pay at least as much of their income in taxes as the middle class, joining European governments in an attempt to squeeze more from the rich.
But while the optics of asking the wealthy to bear more of the burden for deficit reduction may play well politically, the U.S. President is likely to face the same disappointing reality as leaders in Italy, France and Spain.
Any revenue generated by new levies on the wealthiest taxpayers would likely be modest – mostly because there are just not enough of them.
Mr. Obama’s idea may not get far, anyway. Republican opposition to tax increases of any kind means his proposal risks being dead on arrival.
“Class warfare may make for good politics, but it makes for rotten economics,” GOP congressman Paul Ryan, who heads the House of Representatives budget committee, quipped on Fox News Sunday.
The broader aim of Mr. Obama’s call for a new minimum tax rate for millionaires, however, is to strike a populist tone for the 2012 campaign and show the disgruntled Democratic base he still shares its core values.
Mr. Obama is expected to announce his so-called “Buffett Rule” when he unveils his deficit reduction proposals on Monday morning. The plan draws its name from billionaire Warren Buffett, who has complained that the U.S. government is “coddling” the superrich like him.
Mr. Buffett has singled out the rate at which investment income and capital gains are taxed as the main culprit. The capital gains rate was slashed to 28 per cent by Ronald Reagan and to 20 per cent by Bill Clinton. Under George W. Bush, Congress chopped it to 15 per cent.
The result, Mr. Buffett maintains, is that he paid only 17.4 per cent of his 2010 income in taxes. His salaried office employees paid an average of 36 per cent, since they rely far less than their boss on investment income and pay proportionally more in payroll taxes.
Mr. Obama is not expected to provide many details on how he thinks the Buffett Rule should work or how much revenue it should raise. Rather, he will ask the congressional committee charged with drafting a 10-year deficit reduction plan by Nov. 23 to consider it.
Mr. Obama has already called for a cap on the amount wealthy Americans can claim in deductions for charitable giving to help pay for his proposed $447-billion jobs bill, which faces an uncertain fate in Congress.
By picking another fight over income redistribution, however, Mr. Obama is signalling he intends to make it a central theme of the 2012 campaign. He has already sought unsuccessfully to unwind Mr. Bush’s tax cuts for households earning more than $250,000.
In Canada, where a Conference Board study last week showed that income inequality has been rising at a faster rate than in the United States, calls for new taxes on the rich appear few and far between.
“The concept of a millionaire’s tax is just not on the radar in Canada,” said Finn Poschmann, vice-president of research at the Toronto-based C.D. Howe Institute. “It clearly is in the U.S. – for political reasons.”
European leaders have also been singling out the wealthy. But what is most striking about such moves is how timid they have been.
French President Nicolas Sarkozy’s temporary surtax on those earning more than €500,000 will bring in only €200-million in 2012, a tiny fraction of the €11-billion in deficit reduction measures set to take effect next year.
Italy’s Silvio Berlusconi has backtracked, limiting a new surtax to those earning more than €300,000.
Spain’s Socialist central government has announced plans to reintroduce the wealth tax it eliminated in 2008. But it will be up to regional governments to decide whether to apply it.
Part of the reason European leaders have had more bark than bite is that further taxing the rich could provoke an exodus, notwithstanding the willingness of a few of Europe’s own Warren Buffetts to pay more.
From an economic point of view, Mr. Obama has much more flexibility to tax the rich without sparking a stampede for the exits. But, as in Europe, his tax proposals may end up being more symbolic than substantive.