Senate Rejects Buffett Rule – Fighting Stupidity with Logic

by Darwin on April 16, 2012

Politicians do a lot of stupid things, but this “Buffett Rule” proposed by the administration practically takes the cake.  The measure, named after Warren Buffett for his observation that his effective tax rate was lower than that of his secretary, went to the Senate for vote today and flopped with a 51-45 tally, which shows there are at least 45 Senators out there who are dumber than I thought.  Well, really, the dumbest are the lemming voters who believe them when their upcoming campaign slogans claim their opponents “voted to give the 1% a tax break” by not voting for this screed.  It’s all political shenanigans.  The bill would have imposed a minimum 30% income tax on people making over $2 million annually and phased in higher taxes for those earning at least $1 million. While many might agree that the current tax system is not ideal, the rich should pay more, etc., trying to enact into law something so juvenile and poorly thought out is not only frustrating, but dangerous.  Our laws should not be constantly tinkered with based on the latest headline while distracting Americans from the real issues.  Let’s be honest, the few Billion dollars this bill would have raised over the next decade is a mere fraction of the deficit spending in the administration’s most conservative budget estimates.  It would do nothing to address our deficit issues, but threaten the capital formation and risk-taking entrepreneurial engine that drives this country.  Just like Obama focused all political capital on ramming through a critically flawed healthcare reform zombie while the economy cratered, he is now focusing all efforts on raising taxes rather than cutting spending.  Heck, he’s even criticizing the damn Supreme Court!  He’s truly off his rocker, but there are enough Americans willing to go along with it because it’s no skin off their back (so they think).  Here are a few very basic, non-political reasons why this concept is utter nonsense:

  • Different forms of Income Should and MUST be Taxed at Different Rates – Romney’s low tax rate came under fire when he released his tax forms after the “Buffett Rule” started getting attention in the media.  Pundits howled that a guy who reported millions in income paid a tax rate lower than many middle class Americans.  That was the headline.  Now for the facts: we need different tax rates for different types of income.  Routine wage income is taxed at one rate, while capital gains and dividends are taxed at a lower rates.  Why?  Well, your salary is fixed and guaranteed (as long as you’re employed!).  But basically, you know you’re getting that paycheck each month.  It’s low risk.  Therefore you pay a scaled tax rate based on your income level.  Seems logical, right?  Now, let’s say you want to take some of that hard-earned money and either spend it or invest it.  If you want people to put their capital at risk and invest it, you’d think they should be taxed at a lower rate to spur investment, right?  The higher the tax rate on investment, the less investment you get.  This would diminish funding for startups, small businesses, stocks, real estate and other forms of at-risk investment.  I know, critics like to say, “Rich people are going to invest one way or the other”.  Are they?  Every minor change in policy or assumptions changes behavior.  Just like higher gas prices or inflation act as a tax on routine spending habits, higher taxes diminish investment.  After all, why would you take risks for lower net returns?  But that’s just one issue.
  • Double-Taxation!  So, you’re taking income that someone earned first and already saw a tax on, and then you’re taxing them again for trying to put it at risk and invest it.  Of course that tax rate should be lower!  Now, you’re gonna tax a high earned at something north of 30% for earning the money initially, and then tax them at 30% again on their gains?  This is lunacy.
  • 30% is an arbitrarily contrived tax rate – Just like how Obama has sought to define what a “fatcat health plan” is or now impose a “millionaire tax”, it is an arbitrary number at the intersection of absurdity and public appeal.  The fact is, “Middle Class Americans” don’t pay an effective tax rate of 30%.  In fact, most Americans don’t pay any federal income tax at all!  Of course, they’re howling to increase taxes on the rich – this further distances them from ever having to pay taxes themselves (so they think).  Lest critics start shouting about the payroll taxes, state taxes and such that many middle income earners do pay, well, the rich pay those too.  We’re talking about federal income tax here and the fact is, around half of your American peers pay no federal income tax.  Half.  And those that do tend to have effective tax rates in the single digits or low double digits.  It’s not until you start making a few hundred grand a year that you’re paying anything close to a 30% effective tax rate.  So, the 30% is a contrived money-grab.  They probably would have made it even higher if they thought it could pass.
  • Americans Will Dodge the Tax Anyway – Just like the Healthcare reform bill, virtually every stimulus bill, cash for clunkers and other finance-related legislation has been gamed, so would this provision.  Rich Americans would just find a way to offset their income, invest in other assets, move overseas, or do whatever else is necessary to avoid such a ridiculous tax scheme.  Whatever projected income they promise now, the end result will be nothing close – just like every other projection (lie) we’ve seen out of Washington.  Remember when they promised where the unemployment rate would be if we got that fat stimulus bill passed?  Remember how housing was supposed to recover with all these giveaways to deadbeats?  Remember?  It will just be another game of cat and mouse with more legislation to follow, all the while diverting attending from the real issue –>
  • Underlying Issues Remain Completely Unresolved – As has been demonstrated time and time again, even if you taxed millionaires at 50%, you wouldn’t even approach closing our deficit gap.  This amounts to pennies on the dollar that we’re collecting compared to the raging deficits we’re running.  And just take a look a few years out when the spending really kicks in!  We’re screwed, and this is finger pointing and class warfare at its finest.

 

Disclosure: I’m not a millionaire, nor do I project a multimillion dollar income in the near future.  I can just tell bullshit when I see it.

 

Do You Support the Buffett Tax?

If So, Do You Pay Federal Income Taxes?

 

 

{ 11 comments… read them below or add one }

College&Beyond April 17, 2012 at 9:47 am

Who would in their sane minds agree with the Buffet Rule. Increasing taxes is not the solution to reduce our deficit, as many americans have learned the hard way (due to the recession and the financial disaster) the only way to reduce a deficit is by cutting expenses. Darn many americans learned their lesson and are now saving more, and being more careful with their money. What I dont get is why the goverment, with all the great economist and PHDs they have there can not figure out something so simple as a middle school equation:

Incorrect : Expenses >Income = Deficit

Fix: Expenses < Income = Surplus (Yeah Canadians we are looking at you)

The solution is at hand, but no politician has the courage to make the bold moves that are required to bring back this country to the right track. By no means I am an Economist or claim to know how to manage a country, but if I average Joe can bring their household finances in order , why cant our Government do the same?

It has been proved that by reducing the tax rates for all income brackets the revenue collected actually increases to to a higher inflow of capital to the country ( and less tax evation). I will provide a link to a publication supporting my statement shortly.

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Darwin April 17, 2012 at 3:03 pm

That’s the whole Laffer curve argument that liberal hate and conservatives love. Politics aside the bill, especially naming it after a guy who spent his entire life paying these “low taxes” he’s complaining about and waits til he’s 80-something to offer a solution is complete nonsense. The Treasury has a unit set up specifically for people who want to donate additional revenues to the government above and beyond their tax liability. Buffett has yet to contribute as far as I’m aware.

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JT April 17, 2012 at 1:34 pm

More politicking for election season. Buffett Rule revenue increases amount to $48 billion over 10 years. Interestingly, that’s also the cost to keep the government running for about four days.

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Darwin April 17, 2012 at 3:01 pm

Yes, it demonstrates it has nothing to do with closing our fiscal gap (which he claimed it would “fix” hahaha), but is solely politicking and class warfare. again.

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Stu April 17, 2012 at 2:30 pm

Darwin,
Unless I’m reading it wrong….
Shouldn’t the first few lines say that Buffett’s tax rate was LOWER than his secretary and that there are *51* Senators who are dumber than you thought? (the 45 voted against it, correct?)

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Darwin April 17, 2012 at 3:00 pm

Right you are on point 1, thanks! But on point 2, it was the 45 who voted for it that are baffoons. Fortunately, there weren’t enough of them to get it to pass at this juncture.

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College&Beyond April 17, 2012 at 3:06 pm

Stu:

Darwin clearly stated that the rule was overthrow in the senate 51-45 , the “45″ that he is referring as dumb are those that voted in favor of imposing the rule. I agree with his statement because noone in their logical mind should even have to think twice to bury this “Rule” in a underground bunker so it can never be brought back into the light. Taxing our spending out is not the way to solve the problem (As revenue increases, expenses will follow; and unfortunately money will flow to countries with lower tax rates) , we need to have fiscal accountability and force the goverment to cut their expenses, inmediately (Less than 5 years) to levels under those of the revenue collected, that will create that “thing” that seems lost from governamental vocabulary , “Surplus”. Darn it, Canada did it and they did not have to raise taxes in order to achieve it. (I know their tax rates are higher and that their social safety network is better implemented, perhaps we should ask them how they did it.)

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Stu April 18, 2012 at 3:18 pm

You’re preaching to the choir! We definately have a spending problem that needs to be fixed sooner rather than later. Regarding the senate vote, I read it as 51-45 vote Yay/Nay which is obvisouly backwards since it didn’t pass. In my mind I expected to see it as 45-51 (still not passing). That with ‘the Buffett pays higher rate than his secretary’ line put me in the wrong mindset.

Regarding the actual number of baffoons in the senate, there are many on both sides so I’d wager the number closer to 100 than 45….but that’s another story.

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101 Centavos April 18, 2012 at 5:32 am

That 51 that voted the “right” way on this issue will be sure to disappoint on the next measure, being the special-interest-driven political whores that they are. The Feds could tax 100% of income of the $2 million mark, and it still wouldn’t fix the budget problems. Idiots….

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College&Beyond April 18, 2012 at 8:07 am

Have faith, great things are achieved one step at a time. At least this tax increase was avoided; they could mess the next law that comes by their hands but we have to at least give them the benefit of the doubt. Who knows, maybe hell will freeze this November and we will have tax rates cuts.

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Investor Junkie April 18, 2012 at 9:44 am

Don’t forget Buffett’s companies also owe $1 Billion in back taxes, and they are protesting it.

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