The Sense Behind the Buffet Rule

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?

Advertisement

It Isn’t Envy, Mr. Romney, and It Isn’t a War on Capitalism Either

Mitt Romney is the former governor of Massachusetts, but you wouldn’t know that by looking at his campaign presentation. Rather than pointing out his experience in the actually process of governing, Mr. Romney has chosen to campaign on his career in the private sector as a “conservative businessman” and “job creator”, as he often describes himself at campaign stops and in debates. After winning the New Hampshire primary, he gave a victory speech that bypassed his primary opponents and blasted the President for engaging in “the bitter politics of envy”. On Wednesday morning, NBC’s Today Show host Matt Lauer asked specifically about that choice of phrase.

So, if you dare to raise questions about Mr. Romney’s business decisions, it’s just because you’re so jealous of him. Can you possibly get a more self-absorbed sound byte? It made me think of Gordon Gekko’s “Greed Is Good” speech from the movie Wall Street.

No, Mr. Romney, everyone who whats to see proof of your claims of net job creation and wants to know whether your decisions regarding the leveraging of debt and the mass layoffs were the actions of a shrewd businessman or a corporate profiteer is not envious of you. They are vetting you, sir. That is what happens in a campaign. You make claims that you’ve done fabulous things, people say “Oh yeah, prove it,” and then you either give them the proof they’re asking for or they will go off and find it on their own. Also, the more time it takes you to prove your claims – the more you squirm, and hedge, and try to explain why no proof should be needed because you’re such a nice guy or whatever your excuses are – the more people will start to wonder if you’re trying to hide something from them. Running for president is, after all, a candidate applying to the American public for the job of running the country. Asking for more in-depth information on the business practices of the man running for office under the banner of “the business guy” is not anything I see as questionable. To return to my job application analogy, it can be likened to a potential employer asking for references at a job interview. The more cagey an applicant about supplying the references, the more the employer will no doubt wonder if there is something that this applicant might be misrepresenting. Does the “scheduling conflict ” they listed as their reason for leaving Company X really mean that it clashed with their grad school courses, or could it be that this person’s definition of “lunch break” more closely resembled the rest of the world’s definition of “afternoon off?”, the prospective boss might think and questions like those floating around in potential employer’s mind doesn’t bode well for the bumbling applicant. The best thing Mr. Romney could do for himself right now is open up about his Bane Capitol days. It’s not like Democrats won’t be asking these questions in the general election if he makes it to the next round.

My other issue with Mr. Romney and his supporters is that while they condemn those to there left for using what they deem to be the rhetoric of class warfare, they are waging a pretty good battle on that front themselves by labeling those who would criticize predatory capitalism, what most would consider unethical, “bad” business practices, as trying to destroy capitalism in general. That argument make absolutely no sense at all and yet it is everywhere. This becomes crystal clear if you use this logic outside the realm of election year economic policy. For example, if I say that I don’t like a particular painting, then using, this thought process, I am against painting as an art form and trying to engineer its demise. If I don’t like a particular book, then I am obviously crusading against all of literature. If I eat brussels sprouts and say “yuck,”, then I am really saying “DOWN WITH VEGETABLES!” In every other context this line of pseudo-reasoning is quickly and easily identifiable as a heap of bullfunky, but apparently if you’re talking about how big money people make big money when one of them want to be President, such talk is apparently tantamount to heresy in this country and particularly in this country’s Republican party.

There is nothing wrong with examining our economic system to see if it is working effectively and doing a little routine maintenance when it’s needed to keep the country moving. You can have vibrant and competitive capitalism without allowing it to become predatory. It’s all in how the game is played and what the rules are. Many people have a problem with the practice of outsourcing, for example, and it has been stripping the country of  jobs since the eighties, yet there are tax incentives for companies that outsource and business organizations support this practice and lobby to keep it as an accepted way to do business in America, but not really in America. Until the incentives to send jobs overseas are eliminated and perhaps there are even incentives set up to bring jobs back here, we will continue to be bled of every job it is possible to outsource because that makes these companies the greatest profit. That’s not a criticism or a compliment, it’s math.

That brings me to another point – corporations are not people. The best analogy I can come up with is that corporations are like robots. They have a few things in common with people – they can be sued, etc – but they are basically computers running on a yes/no system (hello, binary) which analyzes whether or not a given circumstance is profitable. If the answer is yes, that options chosen. That’s it. There are no emotions involved. Workers don’t matter beyond their productivity to cost ratio. You can’t be angry about it not having feelings or empathy – it’s just a machine after all – so if you want to change its behavior, you have to alter the program it runs on. We have a minimum wage, so even though it would be more profitable to pay American workers a dollar an hour, the robot of an American business, let’s call it RoboCorp, won’t do that because the program it runs on tell’s it that it can’t.  RoboCorps large and small run off of the same basic program – the rules our economy runs on. We have to engage in a national discussion about the economy to decide if changing laws is necessary and if so, then what needs to be changed.

That is the discussion that is being derided as anti-business by Mitt Romney and his surrogates. In that video Mr. Romney says that talk of the economy should take place in “quiet rooms” and that brings to mind images of the Gilded Age when the titans of industry would meet in private clubs and decide what the rules were among themselves and far away from the little people who worked for them. Those workers could vote, well, as long as they were male citizens over the age of 21 and in some places they kind of had to be white too, but, voters or not, they couldn’t be part of any serious economic dialogue because they didn’t have enough power or money. They didn’t know the right people in the right context, they didn’t belong to the right clubs, etc. That’s not how things are supposed to work now a century later. I’m not naive enough to think that power and money don’t buy influence in this day and age, but everyone should be able, and is able, to discuss economic policy just as they do foreign policy and social issues. No quiet rooms required.

The Rachel Maddow show Thursday night brought up another point last night and I thought it was worth a mention. (The video is long, it wouldn’t embed, and there is a somewhat related story about a dog and his bodily functions. Sorry.)

http://www.msnbc.msn.com/id/32545640

Visit msnbc.com for breaking news, world news, and news about the economy

As mentioned in the clip, in 1992, times were tough and George H.W. Bush had an image problem. He was seen as an out of touch rich guy who just couldn’t understand what kind of problems the country was facing and he lost the election at least in part because of that. Somebody needs to knock on the door of the quiet room  Mr. Romney likes to work on economic issues in and remind of that.