Thursday, April 12, 2012

"Fairness", Taxes on the Rich and Public Sector Compensation Levels

President Obama wants the rich to pay more taxes.

He now asserts that it's all about seeking fairness between Americans. He barely tries to make the case that taxes should be used to foster strong economic growth and therefore increased tax revenues.

The Obama Rule says this in part:

"Forget Warren Buffett, or whatever other political prop the White House wants to use for its tax agenda. This week the Administration officially endorsed what in essence is the Obama Rule: Taxes must be high simply to spread the wealth, never mind the impact on the economy or government revenue. It's all about "fairness," baby.

This was long apparent to those fated to closely watch the 2008 campaign, but some voters might have missed the point amid the gauzy rhetoric about hope and change. Now we know without any doubt. White House aides made it official Tuesday in their on-the-record briefing on the new federal minimum tax that travels under the political alias known as the "Buffett rule."

The policy goal is to impose an effective minimum tax of 30% on the income of anyone who makes more than $1 million a year. When President Obama first proposed this new minimum tax he declared that the rule "could raise enough money" so that we "stabilize our debt and deficits for the next decade."

Then he added: "This is not politics; this is math." Well, remedial math maybe.

The Obama Treasury's own numbers confirm that the tax would raise at most $5 billion a year—or less than 0.5% of the $1.2 trillion fiscal 2012 budget deficit and over the next decade a mere 0.1% of the $45.43 trillion the federal government will spend. When asked about those revenue projections, White House aide Jason Furman backpedaled from Mr. Obama's rationale by explaining that the tax was never intended "to bring the deficit down and the debt under control."

Okay. So what is the point?

The goal, Mr. Furman explained, is to establish a "a basic issue of tax fairness." Millionaires should pay an effective tax rate no lower than a middle-class secretary or a plumber. But wait: IRS data show that middle-class workers on average pay just under 15% of their income in federal taxes, while the richest 0.1% pay almost twice as high a rate on average, or 26%....

The Buffett rule is really nothing more than a sneaky way for Mr. Obama to justify doubling the capital gains and dividend tax rate to 30% from 15% today. That's the real spread-the-wealth target. The problem is that this is a tax on capital that is needed for firms to grow and hire more workers. Mr. Obama says he wants an investment-led recovery, not one led by consumption, but how will investment be spurred by doubling the tax on it?

The only investment and hiring the Buffett rule is likely to spur will be outside the United States—in China, Germany, India, and other competitors with much more investment-friendly tax regimes. The Buffett rule would give the U.S. the fourth highest capital gains rate among OECD nations, according to a new study by Ernst & Young, to go along with what is now the highest corporate tax rate (a little under 40% for the combined federal and average state rate). That's what happens when politicians pursue fairness over growth."

Now we know our President wants to spread his version of fairness throughout the U.S. by treating everybody fairly.

Being fair sounds fair enough to me. But what does fairness mean? And who gets to decide what's fair? The President? The Congress? The Democrats? The Republicans? We the People?

Let's consider another timely example of fairness.

In other words, let's be fair to those performing comparable work in the public and private sectors, Mr. President. OK?

Overpaid Public Workers: The Evidence Mounts details the degree to which unions in the public sector (big supporters of the Democrats and President Obama, by the way) have negotiated pay and benefits for government workers which are much richer than those paid to their counterparts in the private sector for doing comparable work:

"One year ago, Wisconsin Gov. Scott Walker signed legislation increasing the pension and health contributions of public-sector employees and restricting their collective-bargaining power. The governor set off a firestorm that continues today, with a recall effort being waged against him and his allies.

In Ohio, Gov. John Kasich signed similar legislation only to see it repealed in a statewide referendum last November. And nationwide, as governors and legislators seek to rein in labor costs, public-employee unions are protesting that their members are actually underpaid. But a growing body of evidence strongly suggests that their protests have no basis in fact.

When the public pay debate began to simmer two years ago, we were among the few analysts to show that many public employees—federal, state and local, including public school teachers—are paid more than what their skills would merit in the private economy. Our core insight was that public-sector pensions are several times more generous than typical private-sector plans, but this generosity is obscured by accounting assumptions that allow governments to contribute far less to pension plans than private employers must. . . .

Most prior analyses of public-sector compensation were severely understated because they looked only at how much governments contributed to pension funds—not how much governments were on the hook to pay out. This meant that state and local government finances were in much worse shape than people long believed. . . .

The Congressional Budget Office . . . found that the federal retirement package of pensions plus retiree health care was 3.5 times more generous than private-sector plans, contributing to a 16% average federal compensation premium.

Even more recently, an analysis by two Bureau of Labor Statistics economists, published in the winter 2012 Journal of Economic Perspectives, concluded that the salary and current benefits of state and local government employees nationwide are 10% and 21% higher, respectively, than private-sector employees doing similar work. This study didn't even factor in the market value of public-pension benefits, nor did it include the value of retiree health coverage.

Basic fairness requires that public employees be paid for their skills at the same market rates as the taxpayers who fund their salaries and benefits. In some states accommodations have been struck, but in others further confrontation remains likely."

Summing Up

Public workers are paid by private sector workers. Public sector workers are paid more for comparable work. That's not fair.

President Obama believes that the rich don't pay enough taxes, even though they pay on average almost twice as much as a percentage of income (26%) as middle class taxpayers pay (15%), while almost half of Americans pay no income tax at all.

If that's an unfair advantage to the rich among us, what about the public versus private sector compensation, pension and retiree health care discrepancies between the higher paid government workers and the taxpayers who are forced to pay for those benefits--the lower paid private sector workers doing comparable work?

That doesn't seem fair to me. How about you, Mr. President?

Does the fact that rich people aren't a big voting bloc and in any case may not be inclined to support Democrats, enter into the presidential calculation when deciding what's fair and what's not fair?

And does the fact that most public sector union leaders support Democrats enter into the presidential calculation when deciding what's fair and what's not fair?

If so, is it fair for the President of all the people to openly discriminate in favor of one group of Americans over another group of Americans just because of how they may vote?

And is it fair to drive the deficits and national debt higher in order to pay public sector workers more than they would be able to earn in the private sector doing comparable work?

And is it fair for government workers to have greater job security than their private sector counterparts?

It would be nice to hear our duly elected President address these simple issues of fairness by answering the questions presented hereinabove.

Now that would be the fair thing to do, wouldn't it?

But it ain't ever gonna happen.

How sad.

Thanks. Bob.

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