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Why The Buffett Rule Is Just A Start

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Should the incomes of the rich and famous be taxed on the basis of the Buffett Rule? That’s the latest question on the political front, a question which explains just how distorted our political conversation has become.

The Buffett Rule would tax incomes of $1 million or more at the rate of at least 30%. The Tax Policy Center estimates that 116,000 households would face higher taxes by 2015.

According to the Census Bureau in 2010, the latest year for which we have figures, there were 117,538,000 households. The number of households impacted by the Buffett Rule would be, oh gosh, about one per thousand. In other words, a minority of the top 1 percent, the upper crust of the upper crust.

The idea of a higher effective tax rate for the rich comes in part from Warren Buffett, the Nebraska-based billionaire who says his tax rate is lower than his secretary’s. Under the Buffett Rule if you make $1 million or more you could expect to pay an additional $170,000 according to the Tax Policy Center. That figure suggests that without the Buffett Rule high-income households now have an effective tax rate of just 13% ($1,000,000 x 30% = $300,000. $300,000 less $170,000 = $130,000 or 13%.)

So now the Buffett Rule is at the center of a huge debate: should millionaires and billionaires pay at least a 30% tax rate? If you think about it the whole question is strange for several reasons:

First, the government has a massive deficit. A major reason for that deficit is a lack of tax revenues. Some applaud the government’s financial problems, seeing smaller tax revenues as a way to “starve” the national government. Of course, they don’t seem to object to the paved roads that run outside their homes or the security of living in a nation where your money is safe.

Second, the argument is made that one reason taxes are so high on the poor and middle class is that 100% of their income is typically subject to Social Security taxes. The solution to this problem is to apply the Social Security tax to all income, including dividends, interest and capital gains. After all, if there is no income test to receive Social Security then why should some forms of income be excluded from taxation? Why should a dollar earned on the factory floor be taxed higher and effectively worth less than a dollar from dividends or interest?

Third, worries about a 30% tax rate for our financial elite are laughable. Under President Reagan the top marginal rate was 69% and it was 92% under President Eisenhower, 91% under Kennedy, 77% under Nixon and Johnson, and 39.6% under Clinton.

The Reagan Tax Increases

Reagan, according to Bruce Bartlett, agreed to least 11 tax increases during his presidency. Mr. Bartlett, by way of background, was a senior policy analyst for President Reagan and deputy assistant secretary for economic policy at the Treasury Department during the administration of President George H.W. Bush.

The Buffett Rule should be regarded as the first step in an effort to balance the nation’s finances before there are no finances to balance. Happily, Mr. Buffett and many in the upper brackets understand that paying taxes is not unfair, that they won’t miss a meal and that a functioning federal government and working social contract benefit everyone.

The Social Contract

The social contract? Yes. This is why the rich from all over the world come to the US. As Barron’s explains:

“Any private banker will tell you, that as soon as a centa-millionaire in Moscow, Beijing or São Paolo makes their fortune, the first thing they do is figure out how they can ferret away large chunks of that wealth to countries that guarantee political and personal freedoms, have sound legal systems, a favorable tax environment, good security and good schools for their kids. Those last two items are not to be underestimated. When asked what was the most important factor drawing them to a city, 63% of the globe’s super-rich said ‘personal security’ and 21% said ‘education.’

“Being wealthy in Russia or China or Colombia or Egypt,” said Barron’s, “comes at great personal risk. If a wealthy businessman falls afoul of politicians in any of these countries, or attracts the attention of gangsters, it’s in the realm of very real possibilities that they will get a midnight knock on the door. Best to have a bolt-hole beyond the reach of the local thugs, political or otherwise.” (See: Why London, New York Draw the Wealthy, March 30, 2012)

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