President Obama's strange definition of fairness

During his State of the Union address Tuesday night, President Obama pushed for higher tax rates on what he called “the wealthiest Americans.”

He declared: “Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes.” As usual, the president motivated the higher taxes with references to “fair play” and getting the wealthy to pay their “fair share” of taxes.

“Fairness” was the codeword of the State of the Union address, not the chronic problem of lingering high unemployment, something the president never even mentioned.

Of course, Obama emphasized “fairness,” but his newest attacks on the wealthy not paying their “fair share” very conveniently comes right after Mitt Romney revealed that he has averaged paying a 14 percent tax rate over the last two years.

Unfortunately, some Republicans come across as confused about capital gains taxes. Romney pushes a weak defense of himself rather than an explanation for why capital gains should be taxed at a lower rate than other income.

In the NBC News debate in Tampa on Monday night, Romney explained: “But I paid all the taxes that are legally required and not a dollar more. … I don’t think you want someone as the candidate for president who pays more taxes than he owes.” Many voters surely hear the exchanges from the two sides and conclude that while Romney may have obeyed the law, the tax law is “unfair” and should be changed.

Still worse, Romney seems content to take other Republicans down with him. Romney attacked Newt Gingrich's tax proposal on Monday, which Romney warned would let him get away with paying even less taxes:

ROMNEY: Mr. Speaker, [under your plan] is the tax on capital gains also 15 percent or is it zero?

GINGRICH: Zero. ROMNEY: Well, under that -- under that plan, I`d have paid no taxes in the last two years.

Most of Romney’s income has been derived from capital gains, which are taxed at a maximum rate of 15 percent. But neither Obama nor Romney explains why capital gains taxes are lower than taxes on other income.

The explanation is actually pretty simple. For every dollar that a company makes, state and federal taxes take on average 40 cents. Who bears the burden of those taxes? The owners of the companies, the shareholders, of course. Not some abstract corporation.

Thus the owners, including Romney, are already paying ten percent more in taxes than Obama claims is their “fair share.” Even the 35 percent federal corporate tax rate is by itself greater than what Obama says should be paid.

How much money in taxes is Obama really proposing that American investors pay? Imposing another 30 percent federal tax comes on top of the 40 percent corporate rate that shareholders are already paying. Obama’s proposed 30 percent tax rate may sound “fair,” but he is completely ignoring the corporate income tax.

Obama claimed in his State of the Union address: “we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.”

But where is the fairness in imposing such a much higher high tax rate on those who invest in American businesses?

Are such high tax rates on investors really making sure that “everyone plays by the same set of rules”?

If the president really wants to do something about fairness, he can try not giving out huge government favors to politically favored Democratic billionaires.

While Obama showcased billionaire investor Warren Buffett’s secretary to the nation on Tuesday night and talked about the tax rate that she pays, there was no mention that Buffett’s Burlington Northern Santa Fe LLC is going to receive hundreds of millions of dollars because Obama killed off the Keystone pipeline.

Much of the oil that would have been shipped by the pipeline will still get shipped by Mr. Buffett’s much more expensive railroad.

Or what about the half billion dollars that Obama gave to Democratic billionaire David Prend’s Solyndra?

Or the list of other companies owned by other wealthy politically-connected Democratic billionaires such as Tesla Motors, NRG Energy, and Abound Solar Manufacturing that are receiving billions in government money?

Our corporate tax rates are already the highest in the world and this discourages investment not only by Americans but also foreigners. Obama’s proposed higher taxes will hit the incentive to invest even harder. Fewer investments mean less productive workers and lower wages. So much for Obama's notion of fairness.

John R. Lott, Jr. is a contributor. He is an economist and co-author with Grover Norquist of the forthcoming "Debacle: Obama's War on Jobs and Growth and What We Can Do Now to Regain Our Future" (John Wiley & Sons, March 5, 2012).