Tuesday was a signal day for the 2012 presidential election: Mitt Romney conclusively became the presumptive nominee for the Republican Party after Rick Santorum suspended his campaign, and President Obama launched a full-throated attack on wealth and privilege, setting the stage for a campaign that will use the gap between rich and poor as a centerpiece.
The president’s speech was delivered before an enthusiastic crowd of students at Florida Atlantic University, and in it he not only attacked Republican plans for the budget but also called forcefully for the implementation of the “Buffett Rule,” under which families with an income of $1 million or more would pay at least the same percentage of their income for taxes as the average middle-class citizen.
“I want folks to get rich in this country … That’s part of the American Dream,” Obama said. “It is great that you make a product, you create a service, you do it better than anybody else—that’s what our system is all about. But understand, the share of our national income going to the top 1 percent has climbed to levels we haven’t seen since the 1920s. The folks who are benefiting from this are paying taxes at one of the lowest rates in 50 years.”
As politics, this agenda may be brilliant. As economics, it assuredly is not.
Romney and the Republicans have hinged their electoral hopes on the argument that the American economy is untenably weak, laden with too much government, too many taxes, and creeping infringements on the American Dream. Santorum would have represented a different twist, with a focus on values and social issues, but with his departure, the narrative returns to the economy. And that, indeed, is the issue around which this election should revolve: the assumptions of the last half of the 20th century—of an ever-expanding United States as an economic colossus catapulting the middle class to ever-increasing living standards—have been obliterated by the cacophonous changes of the 21st. The financial crisis has tested the model even further, and Americans have yet to find a viable path forward that provides for collective affluence, economic security, and a sense of optimism about the future.
Of course, the system is working spectacularly for a small number of extremely rich, hence Obama’s populism and the Buffett Rule.
The speech Tuesday is a harbinger of a campaign built on a cheery criticism of the privileged few who will not bear their fair share of the public burden. Obama’s demeanor is hardly angry or grim, and he manages to make his call for higher taxes on the wealthy seem like common sense while depicting those who oppose it as greedy, mean-spirited misers. “Prosperity has always come from the bottom up, from a strong and growing middle class” in America, he says, and unless they thrive, the country cannot—no matter how well the rich do. For Obama, the point of the Buffett Rule and a minimum tax for millionaires is not to redistribute wealth; it is to enshrine the notion of fairness in the system, to send a powerful signal that we are all in this together and that everyone needs to participate in contributing to the public goods that government provides.
That is a potent political argument. It is a softer form of an old populism that has at times had a far harsher edge. No pitchforks, no storming. It teases and goads the wealthy to be fair rather than excoriate them for being rich. And faced with a multimillionaire adversary in Mitt Romney, it lays down a gauntlet that it is Obama and the Democrats who speak for and defend the needs of the vast middle.
The problem is that as economics, the tax has almost no effect on the gap between what the government spends and its revenue. Assuming that the minimum tax would be about 30 percent of all incomes of more than $1 million, it would translate into about $5 billion a year. In the next decade, current forecasts are for the government to spend about $45 trillion, so the proposed tax would cover a bit more than 0.1 percent of that and leave the yawning trillions of the deficit largely untroubled.
The proposal also fails to note that between the Alternative Minimum Tax and Medicaid reimbursements, other credits, and numerous exemptions, most people pay about 15 percent in taxes, according to the IRS. Indeed, according to the nonpartisan Tax Policy Center (even The New York Times uses it), the richest 1 percent pay 28 percent, while 85 percent of taxpayers pay 12 percent in federal taxes. The bottom quartile pays less than 1 percent of their income—$77 a family. In short, the Buffett Rule basically exists, with the glaring exception of investment income such as capital gains and private equity, the main source of income only for a relative handful of very wealthy people, such as Warren Buffett and Mitt Romney.
The massive gap between the extremely wealthy and the rest of society is one of the characteristics of our age. It is a source of unease precisely because it seems so off in a society that preaches a mantra of equality of opportunity. At the same time, some amorphous but large percentage of Americans hold out hope that one day their fortunes will change dramatically, and that hope alone makes them opponents of higher taxes on the wealthy (“Don’t tax my dream!”).
Still, the political argument is potent because the system overall is sluggish. When everyone is getting wealthier, few object if some are getting a lot wealthier. When everyone is running fast to stay in place, the Croesus-like success of a small minority is much more disturbing and raises questions about who is slicing the pie. And unfortunately, in a globalized world, the wealthy of any society can continue to do much better than any one country of which they are nominally citizens.
The economics are more complicated. The Buffett Rule et al. may succeed as electoral tactics, but someone is going to have to address the fiscal gaps and lack of sufficient dynamism to fill them. Either the United States is going to have to spend more wisely over the next decades, or it will have to grow faster. The Buffett Rule offers no answer to either conundrum. It might get Obama reelected, but it leave us no closer to the answers we need.