Examining The Buffett Rule

As President Obama tries to sell his new jobs plan to Congress, the issue of tax increases on the wealthy seems to be a major talking point. We keep hearing about the "Buffett Rule". In a nut shell, this a reference to some recent comments by billionaire investor, Warren Buffett. He thinks that wealthy people like himself aren't paying enough taxes. He also points out that there's something wrong with a tax code that puts him in a lower tax bracket than his secretary. So far, it sounds like a legitimate argument. But not so fast......

The majority of Mr. Buffett's income is from investments. So, it's not considered earned income. Long term capital gains (anything over 12 months) is taxed at 15%. The bit of information seems to be left out when pushing for the higher taxes. Earned income is taxed at escalating rates, where the highest wage earners are taxed at the highest rates:

Tax Bracket	Single	Married Filing Jointly	Head of Household
10% Bracket	$0 – $8,500	$0 – $17,000	$0 – $12,150
15% Bracket	$8,500 – $34,500	$17,000 – $69,000	$12,150 – $46,250
25% Bracket	$34,500 – $83,600	$69,000 – $139,350	$46,250 – $119,400
28% Bracket	$83,600 – $174,400	$139,350 – $212,300	$119,400 – $193,350
33% Bracket	$174,400 – $379,150	$212,300 – $379,150	$193,350 – $379,150
35% Bracket	$379,150+	$379,150+	$379,150+

Another thing to keep in mind is that most dividends and capital gains are the result of corporate profits, on which regular income taxes have already been paid.

To many, raising taxes on the rich, especially during hard economic times, seems like a popular way to generate revenue. How dare those people live in million dollar mansions and drive Bentleys. The rich are probably not going to get much sympathy from blue collar America. But here's my problem......when did it become so bad to become successful in America? After all, isn't that part of the American dream?

Let's not ignore the fact that wealthiest Americans already pay the majority of the overall tax bill. The wealthiest 5% pay over 50% of the total income tax. And the top half of all taxpayers pay roughly 95% of the total tax bill!

(http://usgovinfo.about.com/od/incometaxandtheirs/a/whopaysmost.htm)

And the rich people of America are often the same folks who create the jobs. So, if these people are squeezed for even more tax money, can we really expect them to hire more employees? If anything, I would expect the direct opposite.

There are some who may argue that the capital gains tax should also be increased. I don't like this idea at all. Americans are already a bit skeptical when it comes to investments. There has to be an incentive for people to take a financial risk. If the risk isn't worth the reward, why even try? I say leave the capital gains taxes alone.

I have heard some politicians talk about the idea of a flat tax and/or a consumption tax. I would not be opposed to these ideas. However, I think it would get spun into another class warfare argument just as the Buffett Rule has been.

I'm not saying that it would be devastating to the rich to pay more taxes. But I also think there are countless families who are living off of the system who can contribute as well. Maybe they can work towards a more productive life and put an end to generation after generation of entitlements. You can call me cold if it makes you feel better. But I know for a fact that there are plenty of people who abuse the welfare system. And there doesn't seem to be much urgency on the government's part to do anything about it.

Hey, here's an idea everyone might actually agree with. If Warren Buffett thinks that he's not paying his fair share of taxes, why doesn't he ease his conscience by writing Uncle Sam a check for a few billion? Better yet, how about if he sends me a check. I'm pretty sure I can spend it more responsibly than the government.

kw