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?



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