The Buffett Rule is Obama’s proposal to impose a minimum tax rate of 30% on those who make more than a million dollars in any given year. Of course the top marginal tax rate on income is currently 35%. Anyone with regular income greater than $388,351 will pay that amount. Income between $217,451 and $388,350 is taxed at 33%. So why is there a a call for the rule at all?
The White House call for the Buffett Rule is based on the fact that tax on long term investments is a flat 15%. If you buy an asset, hold it for more than a year and sell it for more than you purchased it, you pay 15% on the gains. There are many reasons for capital gains taxes being lower than regular income. Here are a few…
- 1) There is risk associated with investing in assets. Tax on gains adds to the risk. Any investment has to pay not just a capital return, but enough to pay the taxes generated as well. For every percentage point capital gains taxes are raised, many marginal business plans become nonviable. Every previously viable business plan made nonviable by taxation reduces growth, reduces employment and reduces wealth creation. Increasing capital gains taxes destroys businesses and destroys jobs. Conversely, lower capital gains taxes promote investment, business, commerce and job creation.
2) Capital gains taxes are very avoidable. If taxes are raised, owners of assets who planned to sell them often choose to sit on them and hope the tax rate comes back down later or new loopholes are created. In this way, an increase in capital gains taxes usually reduces tax revenues. In other words, higher taxes actually reduces the amount of tax collected by the government increasing the deficit and national debt.
3) People usually don’t make over a million dollars year in and year out. Often, people make a million dollars once in their lives. For example, a retiring couple sell the pharmacy they have worked and built up over 45 years. The one-time spike in income after a lifetime of hard work and frugal living was to fund their retirement. The Buffett Rule would penalize them in exactly the same way it penalizes hated Wall Street hedge fund managers. The bad timing of selling their business during Obama’s control of the economy costs the couple tens of thousands of dollars.
4) It doesn’t create fairness. IRS data show that middle-class workers on average pay just under 15% of their income in federal taxes, while the richest 0.1% pay almost twice as high a rate on average, or 26%. Even with capital gains pulling down the effective rate to 26%, the wealthiest Americas still pay more than middle class Americans.
5) Raising the capital gains rate will not reduce the national debt in any meaningful way. Click here to see the effect of the Buffet Rule on national debt. In fact, the Obama Administration doesn’t even dispute this fact. The Buffett Rule “was never our plan to bring the deficit down and get the debt under control,” said Jason Furman, the principal deputy director of the White House National Economic Council on Monday.
Based on the above, why in the world would anyone consider increasing capital gains rates, especially during an election year? Obama explains…
“Right now, the share of our national income flowing to the top 1 percent has climbed to levels we haven’t seen since the 1920s,” Obama said in a speech to students and faculty at Florida Atlantic University in Boca Raton. “And yet those same people are also paying taxes at one of the lowest rates in 50 years.”
“That’s not fair,” he said.
So the Buffet Rule contributes little or nothing to tax revenues, it doesn’t decrease the national debt, it reduces investment and job creation and it penalizes people who work lifetimes for a one time pay out. Obama wants to do it anyway. Why would he do that if it helps no one? It only punishes entrepreneurialism, investment, hard work and delayed gratification. It is punitive. It is class warfare and class warfare is his goal.
Crypto-Marxist class warfare is, after all, the foundation on which Obama’s 2012 campaign is built.