Tag Archives: tax rates

Work and Taxes

If I earned more than a million dollars a year, I would be for the Buffett Rule – not for the reasons that famous billionaires like Warren Buffett and George Soros are for it: because it’s just fair.  I’d be for it because in the long run it would save me money by distracting the public from seeing the roots of class warfare as it is fought in the U.S. Tax Code.

The Buffett Rule says simply that anyone who earns more than $1 million a year should pay at least 30% of their income in federal income taxes.  Legislation to institute this rule is supposed to be voted on this week in the U.S. Senate, sponsored by Democrats and ballyhooed by the Obama Administration.  It won’t pass the House, of course, so it won’t actually affect anyone’s taxes, but it’s a helluva good campaign talisman for Obama and Democrats to run on.

The point of the Buffett Rule is to avoid the kind of obvious inequity that Warren Buffett pointed to in his August New York Times op-ed:  In 2010 Buffett, the second richest man in the world, paid only about 17% of his income in federal taxes (income and payroll taxes) while the 20 people who work directly for him paid an average of 36% of their much smaller incomes.

The Buffett Rule was not devised by Buffett, but by the Obama Administration.  And the first thing that should be noted is that even at 30%, Buffett and other millionaires will still be paying less than the 20 people who work for Buffett, including his now-famous secretary.  More importantly, however, Buffett was clear about why he and other investors paid lower effective tax rates than most workers: income that you do not work for is taxed at a lower rate than income you do work for.

Why this isn’t a scandal in a country that supposedly prides itself on its “hard-working people” is a mystery to me.  If you get your money by investing in stocks and bonds, your income is taxed at a 15% rate because it is unearned.  What’s more, you pay nothing in payroll taxes (i.e., nothing for Social Security and Medicare) because you’re not on anybody’s payroll.

Buffett himself actually still works and draws a salary, and on that part of his income he pays a top rate of 35% and regular payroll taxes on the first $110,000 of that income. But the vast majority of his income comes from investments – capital gains and dividends – and on that part he pays only 15% and no payroll taxes.  Here’s how Buffett explains it: “If you make money with money . . . your percentage may [even] be a bit lower than mine.  But if you earn money from a job, your percentage will surely exceed mine – most likely by a lot.”

Fair shares and percentages aside, the U.S. Tax Code literally says that investors are more valuable than workers, and therefore, should be taxed less. Or it says that investors need more encouragement to invest than workers need to work.  In any case, our tax code fairly screams that only losers and suckers work for a living.

The obvious remedy to this moral abomination is to tax capital gains and dividends (called “unearned income”) the same as wages and salaries (called “earned income”) on the principle that you should not be taxed at a higher rate for earning your income.  That’s how it was after Ronald Reagan signed the 1986 tax reform law, and for most of our history before that.  It was under Presidents Bush I, Clinton, and Bush II that investor privilege was installed in our tax code.  (See the Citizens for Tax Justice’s recent report, “Policy Options to Raise Revenue.”)

Taxing capital and labor income at equal rates would produce much more revenue for the government: $53 billion a year, according to Citizens for Tax Justice, while the Buffett Rule would raise only $17 billion (with other estimates being as low as $5 billion).  You can see why as a greedy, but rational millionaire I’d embrace the so-called Buffett Rule in order to shift the focus away from the basic class bias of our tax code.

There is a theory behind privileging investors by taxing them less.  Namely, investors are “job creators,” and any additional taxes on them will lead to less investment and, thus, slower economic growth, fewer jobs, and even higher unemployment than we have now.  I’ve critiqued this theory before, giving it some credence when it was initially articulated in the 1970s, but showing how it is clearly irrelevant today because investment lags not for lack of money (of which investors have plenty), but for lack of consumer demand that would give investors a reason to invest.  But that’s just me.  I’m not one of the greatest investors of all time.  Here’s what that guy said in his August op-ed:

Back in the 1980s and 1990s, tax rates for the rich were far higher . . . . .   According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.  I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

There are a lot better rules to derive from Buffett’s puckish op-ed than the one the Democrats are using to embarrass Mitt Romney, whose effective tax rate of 14% is even lower than Buffett’s.  Taxing all income at the same graduated rates, for example, would be both simpler and fairer.

While I was writing this post, the Obama-Biden campaign sent me an e-mail asking that I sign a petition supporting the Buffett Rule.  I signed it because Obama’s tax policy is way better than Republicans’ proposed tax cuts for the wealthy.  But the at-least-30%-for-millionaires is a political gimmick without principle, and it leaves in place a tax code that dishonors work and the people who do it.

Jack Metzgar

Chicago Working-Class Studies