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Verdict: Justia.com, February 3, 2012

The Buffett Rule Is an Imperfect Form of Tax Justice, but an Important Step in the Right Direction

by Neil H. Buchanan

Neil H. Buchanan is an economist and legal scholar, a Professor of Law at The George Washington University, and a Senior Fellow at the Taxation Law and Policy Research Institute, Monash. In a well written article he opines:

...  We are-quite appropriately-once again focusing on the extreme inequities in American life, in terms of both how much the rich receive in income, and the surprisingly small amount that they pay in taxes.

... Anyone who looks at the federal income-tax brackets would find it impossible to imagine that this version of the Buffett Rule is even necessary.  The top tax bracket rate is 35%, and it began when a taxpayer’s 2011 income reached $379,150.

... We impose a mere 15% tax rate on income that is in the form of capital gains—that is, income that a person receives from investments in property, stocks, bonds, and so on—even when the taxpayer’s income would otherwise put him or her firmly in the 35% bracket. 

... Why would our tax system countenance such an apparent attack on the value of work? The theory is that it is necessary to induce people to save their money—putting it into the financial markets, where entrepreneurs will borrow it and use it to generate jobs for everyone in the future.  This is sometimes referred to as “sacrifice,” ... Describing what people like Mitt Romney are doing assacrifice, however, reduces the definition of that word to a cruel joke.  The Romney family wants for nothing, and to say that we are taxing them at reduced rates in thanks for their willingness to engage in self-denial is to drain words of all meaning.

... it is unsupported by evidence ... economists have been trying for decades to determine whether special tax rates to encourage financial investment actually deliver what their advocates promise.

... If our goal in designing a tax system is to reduce the incentives to game the system, therefore, we should tax capital gains the same as regular income.

... In the broadest sense, therefore, we cannot define the fairness of the tax system by comparing tax rates.  In an extreme case, it could even make sense for one wealthy person to pay for the entire government’s budget-because that person’s wealth would not be possible without the government, and because that person could still be quite comfortable, even after paying his or her taxes.


2-4-8 Response

The next step:

If the tax base and the various definitions of income are not changed, Neil Buchanan and (I hesitate to say) even President Obama may be correct about the Buffett Rule being an important step in the right direction. Something like two steps forward, one step back. At least 30% is about the same rate the low earners pay when Social Security and Medicare is factored in.

It’s not that I think the additional $40 or $50 billion will be put to good use. President Obama has already said in his State of the Union speech that he wants to have new incentives (i.e. redistribute the wealth) for favored energy companies, certain job creation programs, etc. I support high income tax rates for high earners because I would like to convince the well-to-do that they (and the rest of us) would be better off with a combined 2% wealth tax and 8% income tax.

At the risk of oversimplification, try to contrast a 30% income tax with an 8% income tax combined with a 2% wealth tax for each of the next 11 years. The latter combined tax would permit an individual to keep 22% more salary each year and tax another 2% of the amount not consumed for the next 11 years. If one saved the 22% for 3 years it would be like having a year’s take home in the bank on top of what might have otherwise been saved under a 30% flat tax rate (conservatively assuming the 2% wealth tax was offset by 4% investment interest).

Your article mentions the “Occupy” protesters as if a disparity in income tax rates were the main problem. I see the Occupiers as being more concerned with not having a job, being deep in debt (credit cards, collage loans, etc.) and having little upward mobility even if they could get a job that paid minimum wage or even twice minimum wage, and almost no chance of getting a job with a real retirement plan like congress and other government workers have.

In August of 2006, I made the following suggestion to the President’s Advisory Panel on Tax Reform: tax Net Individual Wealth at 2%, Consumption/Sales at 4% and Income at 8%. The exact same rates apply to the rich and poor. There are no different tax brackets, credits, and no favoritism. The three taxes would yield about $2.6 trillion per year (slightly more than the current combination of Income, Social Security, gasoline and other federal taxes and fees).

It is hard to imagine anyone that wouldn’t welcome a 2% tax on net wealth and a small 4% sales tax, in exchange for drastically reduced 8% individual income tax rate. Even the "fair and balanced" Bill O'Reilly (a/k/a the Factor) supports a national sales tax (of 3%) as a necessary component of tax reform. The concurrent elimination of social security, capital gains, estate and gift taxes; and a significant reduction of the corporate income tax rate to 8% should guarantee near universal support from social liberals and business conservatives alike (he defiantly declared as he waited for some attorney or economist to find a flaw in the plan rather than a lack of political will).

Eugene Patrick Devany

www.TaxNetWealth.com

 
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