Buffett Rule: tempting, but will it help much?

If you’re the sort who nonchalantly follows the news (like myself), you might’ve heard about “the Buffett Rule” and pondered; why is a guy like Warren Buffett, who can barely find his “lost shaker of salt,” trying to influence tax laws in our country?

That exact thought echoed through my head last week as I tried to navigate the confusing landscape of filing my taxes. I was wracking my brain over what to do with a 1099 when I decided to perform a Google search. The search yielded pictures of cats with words on them, and after an hour of chuckling at poor grammar, I became bored finally searched “the Buffett Rule.”

What appeared were articles from newspapers across the country, and I quickly learned that I was thinking about the wrong guy. The news was about Warren Buffet, an Omaha man who’s pretty much the richest man alive.

Despite his status, he’s not totally “swagged out” like you’d expect from a dude of his purchasing prowess. He made his money from smart investments and being frugal; so it’s pretty safe to say that he’s laid-back, plain-Jane, no frills.

But he did make waves on a number of occasions by saying he’s filthy rich because the government doesn’t collect enough from his earnings. In my understanding, he says that the tax structure un-healthily favors the rich. But none of us have the wicked fiscal discipline, or the stacked and diverse investment portfolio equal to Buffett, nor do we have tax-savvy personal accountants.

So what about investment? If all of your income is being eaten up by the IRS, it’s not an option. You’ll lose the farm just trying to pay for fuel and food, much less what Uncle Sam wants to keep the gears turning. So you say, “The rich are getting richer, and I’m stuck barely making it by.” I understand that, and it doesn’t seem fair. But I don’t think the Buffett Rule is helping you get any less poor.

A blanket increase in the capital gains tax will not fix anything, the rich still won’t pay their ‘fair share’, because no tax code will be free of loopholes. Regardless, I keep hearing the proposed legislation will raise $47 billion in revenue for the Federal Government over the next ten years.

While that $47 billion seems pretty positive, it’s not that awesome when you consider our deficit grows by trillions a year. Where will we look to next? Will we look at higher taxing of gains from family run agricultural corporations? A family enterprise might make a bit of money to pass off to their children, but more often than not they invest that capital back into upkeep and expansion of their business.

The bigger the operation, the more employees they hire. The more people you have working, the more people you have getting paid. The more people you have getting paid, the more people you have spending. And the more money spent, the more the economy expands. The same idea can be applied to other American industries. I don’t think you should be punished for running a business smartly and creating job opportunities.

I would be upset if my boss made me work twice as hard, with half the help, but the same pay. Or say he shipped half his operation to Southeast Asia; I don’t think that’s a sound investment on his part; that doesn’t seem fair. In that instance the government should go ahead and collect a percentage of his profit to recoup what he’s not spending here.

On the other hand, for folks creating jobs by investing here in America, I foresee indiscriminately raising capital gains tax as creating a climate where people with capital are too skittish to invest it. Instead, I propose the IRS follow the Missouri motto: “Show me.”

Show me that you created jobs in America. Show me that you improved the standard of living and increased the GDP. Show me that you kept your capital investments domestic. Do this, and we’ll let off the brakes on your gain train. It can’t be a situation where “we give you a break now, and you can give us results later,” you have to pay it forward.

I won’t try to pretend I’m an economics wizard; after all, I’m the guy who confuses Cheeseburger in Paradise with Berkshire Hathaway. But from my perspective the Buffett Rule just doesn’t solve anything in the long run.

The Buffett Rule isn’t about making poor people richer or rich people poorer. It’s about equally sharing the burden of bankrolling our federal government by correcting for those few who take home monumentally vast incomes.

It isn’t a fix for income inequality; it’s barely a Band-Aid. Nor will it gut the investment and so-called job creation abilities of the richest rich people. The top one percent will continue to make salaries so vast, the bottom 99 percent will never catch up.

According to French economists Thomas Piketty and his associate Emmanuel Saez’s research, “from 2000 to 2007, incomes for the bottom 90 percent of earners rose only about four percent, once adjusted for inflation. For the top 0.1 percent, incomes climbed about 94 percent.”

As President Barack Obama has said frequently, loudly, and hopefully not as a mere campaign platitude, the Buffett Rule is about fairness.

The push to get the rule written into law is hindered by a few fallacies and bureaucratic hurdles. The largest hurdle is probably the quagmire of our uncooperative unproductive Congress.

Video-blogger and independent news commentator Ze Frank put it best Monday when he said, “The Buffet Rule is expected to get its ass handed to it by Congress this week. The Buffet Rule proposes that rich people pay the same minimal tax rate that regular people do, which has a cold thing’s chance in a hot place of passing through a chamber made up of rich people.”

The rich-folks composition of Congress and the lobbying power other rich folks have over it, probably makes up 50 percent of the opposition to implementing the Buffett Rule.
The other half is likely people who don’t understand taxes.

When economists and policymakers talk about increasing the minimum tax rate to 30 percent for people who take home more than $1 million, they’re not talking about $300,000. One’s tax rate is a percentage of his taxable income, and taxable income is not the same as adjusted gross income.

In February, The New York Times published an excellent example of how some of the top one percent earners already pay tax rates far greater than Warren Buffett’s 17.4 percent or Mitt Romney’s 17.5 percent.

For example, The Times stated, a self-employed person in New York City who makes $75,000, could have “personal exemptions ($18,500) and itemized deductions for mortgage payments ($25,000), charitable contributions ($5,000) and state and property taxes ($10,158) leaves the taxable income of $11,044.”

However, because of the State and Federal tax rates on an income of $75,000 this earner’s percentage rate places his taxes owed at $12,473 or 113 percent of his taxable income ($11,044).

But even at $12,473, the hypothetical person is only paying 16 percent of the total $75,000! The Times also provided a real example of a real estate executive who takes home more than $1 million a year in salary who paid taxes at a 102 percent rate.
When folks making $75,000 a year are paying 113 percent, and the lesser 1 percent millionaires are paying 102 percent, it’s absolutely preposterous that we allow the mega-rich to pay 17.5 percent.

In a separate New York Times article, published Monday, Thomas Piketty, of the Paris School of Economics was quoted in the New York Times saying, “The United States is getting accustomed to a completely crazy level of inequality. People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”

The Buffett Rule is likely to lose in the Congressional shuffle, and some Republican bill that will hurt the lower 99 percent of earners in the short term will get rammed through.

But I take heart that such legislation is out there being put forth, and that economists like Piketty and Saez are making the well-supported academic cases for minimum tax rates up to 100 percent on the mega-rich. Even if it fails, the Buffet Rule should remain at the fore of our minds as a blueprint for future reforms.

NYTimes.com’s “How It’s Possible to Pay a 100% Tax Rate”