Cutting taxes

“The American people deserve a tax code that helps small businesses spend less time filling out complicated forms and more time expanding and hiring, a tax code that ensures billionaires with high-powered accountants can’t work the system and pay a lower rate than their hard-working secretaries, a tax code that lowers incentives to move jobs overseas and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.”

That was President Barack Obama talking about “tax reform” during the State of the Union speech Tuesday.

The billionaires making more than “hard-working secretaries” is that nonsensical Buffet rule cropping up again. Gazillionaire Warren Buffet claims it’s unfair that his secretary has had to pay a 30 percent income tax rate while Buffet has only paid 15 percent because his income comes from stock dividends, bond interest and other capital gains. Of course those capital gains were already taxed 35 percent as corporate profits before being distributed to shareholders, resulting in an effective tax rate of 44.75 percent.

If he really wanted to lower his secretary’s taxes he could pay her with stock dividends and lower her salary to the minimum wage.

Under the new “fiscal cliff” tax bill recently passed, Buffet gets to pay 20 percent on capital gains and dividend income, since he makes more than $400,000. Those below that threshold are still held to the 15 percent rate.

Getting President Obama and Senate Majority Leader Harry Reid to agree to sensible tax reform that will eliminate the need for “high-powered accountants” is not going to be easy. The president said as much in his State of the Union address. He also relied on his favorite saying about tax breaks: “Is that fair?”

In 2008 ABC’s Charlie Gibson asked Sen. Barack Obama why he would support higher capital gains taxes despite the fact that “revenues from the tax increased” when the rate was lowered. Obama answered, “I would look at raising the capital gains tax for purposes of fairness.”

We already have “fairness” built into our tax code; it’s progressive tax rates, which means higher rates for higher income earners and lower rates for lower income earners. A fairer tax code would be a flat tax where everybody pays 25 percent with few deductions. And 25 percent for corporations with no deductions, except losses, would encourage those companies to repatriate some of the $1.7 trillion they hold in foreign affiliates.

A 25 percent tax rate was achieved by President Calvin Coolidge and Treasury Secretary Andrew Mellon and that produced a booming economy and a flood of money into the treasury in the 1920s. The duo nearly cut in half the national debt from WWI, which had zoomed to nine times normal.

The national debt was slashed from $27 billion right after the war to $16.9 billion in 1929.

“The combined top marginal normal and surtax rate declined from 73 percent to 58 percent in 1922, and then to 50 percent in 1923 (income over $200,000). In 1924, the top tax rate decreased to 46 percent (income over $500,000). The top rate was only 25 percent (income over $100,000) from 1925 to 1928, and then fell to 24 percent in 1929. By 1927, 98 percent of the population paid no income tax. It is also worth noting that numerous “nuisance” taxes, such as on cars and theater tickets, were eliminated,” according to the Coolidge Memorial Foundation.

Tuesday night President Obama said, “These sudden, harsh, arbitrary cuts would jeopardize our military readiness, they’d devastate priorities like education and energy and medical research. They would certainly slow our recovery and cost us hundreds of thousands of jobs.”

But Coolidge, Mellon and Congress reduced the federal budget from $5.1 billion in 1921 to $3.3 billion in 1929. One thing that helped Coolidge was the creation of the Bureau of the Budget. Another thing was the flood of money that lowered taxes generated, eventually creating surpluses that reached $600 million by 1926.

It worked for Coolidge and Reagan and Clinton. Cutting taxes is the best economic stimulus.