The Sense Behind the Buffet Rule

26 01 2012

That grandfatherly guy with ukulele in the video is Warren Buffett, the CEO of Berkshire Hathaway Inc. and he is a very wealthy fellow. He’s also never made a secret of who he supported politically, most recently President Barack Obama. Last August he publicly weighed in on matters of policy when he wrote an op-ed in the New York Times which got him a lot of media attention. In it he made the argument for a higher tax rate on the capital gains (currently taxed at 15%) which are the main source of income for many wealthy folks meaning that many of those who would be paying the top rate end up paying a rate that is more on par with those at the lowest end of the taxable income spectrum. The White House took the idea which they had also showed support for and ran with it eventually crafting the Buffett Rule – a proposal which would establish a minimum tax rate of 30% on all those earning over a million dollars no matter how they earn their money. This idea resurfaced at Tuesday’s State of the Union address.

Like any other proposal made by anyone at any level of government, it’s something to fight over. The argument against the Buffett Rule is broken into two factions. Some feel that increasing the rate on capital gains for wealthy investors from 15% to 30% would discourage investment because people wouldn’t invest if they had to split their profits 70-30 with Uncle Sam. They also suggest that the downturn in investing would hurt the job market because if people aren’t investing in companies, then those companies can’t grow and that means no job creation, no hiring, and a stagnation of unemployment at our current painful level. I’m not an economics wiz, but I think that sounds a little off and I’m in good company. Mr. Buffett addressed this in his op-ed.

<blockquote>Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.</blockquote>

To put into an average American context, nobody refuses a promotion because they looked at their pay stub, saw all of the deductions that are taken out every week, and calculated how much more would be taken out if they took a higher paying position. Certainly each of us has grumbled about those deductions from time to time, but in the end we would rather make more money and so we would take the promotion and the associated increase in salary. Why would someone who makes money through investing be any different. Why pass up a profitable investment opportunity because of a 15% increase in the tax rate on that investment? They will still be making money and that is the draw of investments.

Other opponents of the Buffett Rule are opponents of the capital gains tax in general and these  critics are further subdivided. Some say that it is double taxation arguing that people invest their money after they pay taxes so to tax capital gains is to tax the same money twice and that is grossly unfair. It would indeed be very unfair if that were the case but it’s not because capital gains are just that – gains, profits, new money, income and thus subject to taxes. The principle investment is not a part of the equation so they aren’t being taxed on the same money twice, just on the money their investment brought in.

Others say that because capital gains have already been taxed as part of that company’s income and therefore should not be taxed once it goes to the investor. There is no gentle way for me to say this, that argument is completely illogical. The money that company pays the people who work for them also comes from corporate revenue which is subject to corporate income tax, yet those workers are taxed on that money and nobody (except the Ron Paul supporters who want no taxes, I guess) complains a bit about it. Investors may not “work” for these companies per se, but they do provide a service – they supply capital – so why should the profits they make from their contributions to the running of a particular company not be taxed while the wages earned by the person whose contribution to that same company earn them a paycheck when it’s all paid out of the company’s (taxed) profits? If you extrapolate this theory out further, almost no person or business would ever pay any taxes. In our current system, our money gets taxed when it’s our income whether or not it has been someone else’s income beforehand. Sorry.

I side with Warren Buffett. Taxing the investments of millionaires at the same rate as the income of a person who works 40 hours a week and takes home, at most, $17 in taxable income an hour is ridiculous. It makes the whole “class warfare” argument a farce when some of the very wealthy are simultaneously lamenting the top tax rate and not paying it. They pay, at most, the same rate as an individual making between $8,700 and $35,350 a year according to the IRS. I don’t begrudge them their success, but I’m certainly not feeling their pain. A millionaire making the majority of their annual income from capital gains should pay a tax rate closer to the rate millionaires who collect a paycheck are paying. How is that class warfare and not just common sense?

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