The Buffett rule

[Michael]

Obama has been touting this based on a comment that Warren Buffet made that his 17.4% tax rate was lower than the other 20 people in his office. Obama is trying to make the point that "rich" people should pay the same tax rate as middle class (poor people pay no income taxes, so that is not a good goal to aim at).

There are, of course, issues with actually implementing the rule and issues even with the basis for it:

>> “I reject the idea that asking a hedge-fund manager to pay the same tax rate as a plumber or a teacher is class warfare,” Obama said at the White House. “It’s just the right the thing to do.”

That example isn&#8217;t as straightforward as it appears. Under current law, that teacher would have a maximum taxable income of $40,500, after subtracting the standard deduction and personal exemption. The teacher&#8217;s federal income tax would be $6,250, or 12.5 percent of the $50,000 income. <<

The above is a quote from a Bloomberg article today. A teacher actually pays less in income taxes (rate) than Warren Buffet does using only the standard deduction.

Any study of the income tax law and statistics shows that there are 2 types of "rich" people - those that are rich because they have high wages and those that are rich because of investment income.

If you are "rich" because you earn high wages, you will pay more as a percentage of your income. This includes most fat cat corporate officers. Deductions even get phased out and the AMT kicks in as well. The real benefit people in this bracket get are the Bush tax reductions on the top marginal rate and they also tend to be able to save more.

In that category are small business owners. Their taxes are more complicated because some income is typically left in their company for growth or investment, but on general, they pay a reasonably high rate.

If you want to tax this category more (I fall into that group, btw), you can raise their absolute rates (increase top bracket or make a new bracket) or further limit their deductions or both.

The other category of "rich" people are those that make most of their income from investment income - more specifically diviends and long-term capital gains (15% rate) and many government bonds (0% taxes). This group includes hedge fund managers with their famous "carried interest".

Increasing marginal tax rates doesn't really effect this group as their rates are capped. You need to change the tax rate on dividends and capital gains (I'll skip carried interest, to complicated and too long a conversation).

Now dividends are already taxed once when the corporation earned the profit and long-term capital gains rates encourage investment. Increasing taxes on either of these will cause the stock market to go down as the current rates are built into stock prices. The low dividend rates are actually good policy today because companies have a lot of cash they are not using and the low rates encourage shareholders to ask for more.

Many countries tax capital gains at zero, others always tax them at normal income rate.

Also, raising the rate across the board hits anyone with even modest income from these sources. The way to get around that is a surtax on such income over a certain amount per year.

I think this tactic is a poor one, focussing on a small number of people who honestly are quite mobile and can shift how they earn income.

My solution is that we should ignore this class warfare BS and raise taxes on every one. More on the "rich" but across the board with a 4 year surtax. We need to get spending under control and we need more income as well if and until spending goes down. Share the tax pain, make the largest number of people mad at the need for the extra taxes to force everyone to take this more seriously.

Michael

 

[PeshakJang]

Some of the proposals Obama has suggested shows that he (or whomever wrote it for him) have little to no idea how financial markets or investment instruments work, at all.

Case in point, in his American Jobs Bill or whatever the fuck his naming machine called it, he wants to reduce the tax advantage of municipal bonds (currently 0&#37; state and federal).

Most lefties would jump up and down saying what a good idea that is, how these rich people shouldn't be getting anything tax free, etc. Unfortunately, once you do that, the market will correct the interest rates that municipalities currently borrow at to higher levels, to ensure similar returns, hence passing the "tax increase" directly to the state or local government, making it more expensive to borrow.

Supposedly, tactics like this will help these small governments. It won't do that, but it is a shining example of how little Mr. Obama's gang understands the real world.

 

[a777pilot]

Why not just go all the way and tax all income over one million dollars at 100&#37;?

....and for corporations:

Tax all profit based on total revenues over the US 30 year Treasury rate, also at 100%. (Today that would be any profit, based on revenue over 3.34%)


OMG!*



p.s., I wonder how old Warren would like that idea.



* Obama Must Go!

 

[First]

Some of the proposals Obama has suggested shows that he (or whomever wrote it for him) have little to no idea how financial markets or investment instruments work, at all.

Case in point, in his American Jobs Bill or whatever the fuck his naming machine called it, he wants to reduce the tax advantage of municipal bonds (currently 0% state and federal).

Most lefties would jump up and down saying what a good idea that is, how these rich people shouldn't be getting anything tax free, etc. Unfortunately, once you do that, the market will correct the interest rates that municipalities currently borrow at to higher levels, to ensure similar returns, hence passing the "tax increase" directly to the state or local government, making it more expensive to borrow.

Supposedly, tactics like this will help these small governments. It won't do that, but it is a shining example of how little Mr. Obama's gang understands the real world.

None of those interest rates will change, though, just as investment frequency didn't when the capital gains rate was reduced from 35% to 15%. It's because investors don't particularly care about relatively marginal increases or decreases in taxes. It's just a fact you'll have to come to terms with, kiddo.

 

[Fern]

-snip-
Now dividends are already taxed once when the corporation earned the profit and long-term capital gains rates encourage investment. Increasing taxes on either of these will cause the stock market to go down as the current rates are built into stock prices.

Yes.

And this illustrates an inherent problem for those (Obama) advocating such changes to tax law. The majority of these special provisions were enacted based upon a perceived economic interest in the US's favor.

If those initial theories regarding the benefit(s) were correct, reversing them is going to result in negative consequences at a time we can least afford.

The carried interest provision needs to go. It's a true loophole and has no intended, or actual, economic benefit. Some portion of the fund managers income will remain taxed at 15&#37;, but the portion properly attributable to earned income needs to be carved out and taxed as such.

I see no reason to support a tax increase until Washington demonstrates it can control spending. As much as we are in a very bad position with no good alternatives/solution I can think of one even worse: Overtaxed AND in deep debt. I'm afraid raising taxes in the current climate will just ensure the latter.

Fern

 

[Fern]

None of those interest rates will change
-snip-

Disagree.

Their rates will change, and those currently holding muni's will face cap losses as the face/principal bond value will fall to compensate for the after-tax decrease of value in the interest (income) amount.

Fern

 

[PeshakJang]

None of those interest rates will change, though, just as investment frequency didn't when the capital gains rate was reduced from 35% to 15%. It's because investors don't particularly care about relatively marginal increases or decreases in taxes. It's just a fact you'll have to come to terms with, kiddo.

Yes, because people with millions of dollars don't really care about the return they get.. they just take what they can get.

Do you know what a bond is? Let's start there.

 

[PeshakJang]

I'd also like to know how many Lefties actually think that Warren Buffett won't be employing a small army of accountants and tax lawyers the second this bill is enacted to ensure that it has little to no effect on him.

He's doing it now while he rails against his current tax rate. What's going to change?

How many think that he isn't going to help write the new rate? Just like Jeffrey "No-Tax" Immelt is helping the president create jobs...

 

[DucatiMonster696]

Why not just go all the way and tax all income over one million dollars at 100&#37;?

....and for corporations:

Tax all profit based on total revenues over the US 30 year Treasury rate, also at 100%. (Today that would be any profit, based on revenue over 3.34%)


OMG!*



p.s., I wonder how old Warren would like that idea.



* Obama Must Go!

As long as Warren can get away with not paying his taxes he'll think its all just peachy to kick the ladder out while others are trying to get to his perch.

 

[ElFenix]

None of those interest rates will change, though, just as investment frequency didn't when the capital gains rate was reduced from 35&#37; to 15%. It's because investors don't particularly care about relatively marginal increases or decreases in taxes. It's just a fact you'll have to come to terms with, kiddo.

to get that lower rate of capital gains you have to hold onto your investment for a while (long term). you're encouraging a lower investment frequency using lower long term rates (speculation bad!). not to mention long term cap gains have always been subject to favorable rates. did it ever change from 35% to 15%?

 

[JS80]

US needs to also lower the corporate tax rate to the effective rate so I stop wasting 1/3 of my life trying to figure out how to not pay US taxes but pay foreign country taxes. I would also save a few hundred grand in legal and tax consulting fees annually. And I would phase out our foreign office and bring work back to US.

 

[Engineer]

did it ever change from 35% to 15%?

It was whatever the marginal rate was up until either 2001 or 2003 IIRC. That would have been 39%. I could be wrong though.

 

[Lemon law]

What this boils down to is a GOP charge that Obama and the dems are now engaing in class warfare. When the GOP and GWB did exactly that by engaging in class warfare by transferring taxes from the upper class to the middle class using the guise of tax cuts for all that has only had the net effect of robbing the middle class. In a reverse Robin Hood of robbing the poor and giving to the rich.

 

[Engineer]

What this boils down to is a GOP charge that Obama and the dems are now engaing in class warfare. When the GOP and GWB did exactly that by engaging in class warfare by transferring taxes from the upper class to the middle class using the guise of tax cuts for all that has only had the net effect of robbing the middle class. In a reverse Robin Hood of robbing the poor and giving to the rich.

Not sure that I understand unless I'm missing something? Did my (middle class) taxes go up or something? My wages may have stagnated buy my taxes didn't go up, they went down (AFAIK).

@ JS80...you want your taxes to go down but not for bringing work back. I've read your posts and you don't give 2 shits about bringing work back. Like spidey, you only care about more money for yourself. And that's fine, but don't post bullshit about wanting it to bring jobs back.

 

[her209]

Raising taxes means lower revenue. Lower revenue means small government. See how that works?

 

[JS80]

Not sure that I understand unless I'm missing something? Did my (middle class) taxes go up or something? My wages may have stagnated buy my taxes didn't go up, they went down (AFAIK).

@ JS80...you want your taxes to go down but not for bringing work back. I've read your posts and you don't give 2 shits about bringing work back. Like spidey, you only care about more money for yourself. And that's fine, but don't post bullshit about wanting it to bring jobs back.

I work for a corporation and my job is to maximize after tax income. We put in a lot of effort to source out US income to a foreign country because tax rates are favorable there. And we don't bring back the money because the US will try to tax global income. So what do we do with the profits? We hire engineers in that foreign country to do development work.

This is all a huge pain in the ass for me. Nothing would bring me more joy than to shut down operations there and hire here in the states. The country is Australia. The timing difference sucks (4pm here is 9am there, which means I am getting emails all night) and Australians are fucking assholes and difficult to work with. They are spoiled entitled little bitches even more than Americans. And their work sucks.

As for your stupid ass statement. You're half right. This will not make more money for myself - here you are wrong. You're right though I don't give a fuck about employment here, and I don't give a fuck about bring jobs back here. Fuck you and other useless people who are entitled to a job. However, aside from that, since I only react to incentives, if the laws change I would bring the jobs back here AND pay more in US taxes because I would have an incentive to do so.

 

[JS80]

Raising taxes means lower revenue. Lower revenue means small government. See how that works?

Ah, the mind of a simpleton.

Raising tax rates = lower revenue. Lower revenue = more borrowing. More borrowing = economic instability.

 

[Engineer]

Fuck you and other useless people who are entitled to a job. However, aside from that, since I only react to incentives, if the laws change I would bring the jobs back here AND pay more in US taxes because I would have an incentive to do so.

I'm not entitled to anything. I WORK for my job and make money for the company I work for. If not, my boss is free (and would) to fire me.

Fuck you right back (touche you sorry prick).

 

[JSt0rm]

I work for a corporation and my job is to maximize after tax income. We put in a lot of effort to source out US income to a foreign country because tax rates are favorable there. And we don't bring back the money because the US will try to tax global income. So what do we do with the profits? We hire engineers in that foreign country to do development work.

This is all a huge pain in the ass for me. Nothing would bring me more joy than to shut down operations there and hire here in the states. The country is Australia. The timing difference sucks (4pm here is 9am there, which means I am getting emails all night) and Australians are fucking assholes and difficult to work with. They are spoiled entitled little bitches even more than Americans. And their work sucks.

As for your stupid ass statement. You're half right. This will not make more money for myself - here you are wrong. You're right though I don't give a fuck about employment here, and I don't give a fuck about bring jobs back here. Fuck you and other useless people who are entitled to a job. However, aside from that, since I only react to incentives, if the laws change I would bring the jobs back here AND pay more in US taxes because I would have an incentive to do so.

I actually like this post. Im all for giving incentives to business.

 

[JS80]

I actually like this post. Im all for giving incentives to business.

Outsourcing drives me fucking crazy - and it's not because of the politics. It's the fact that I have an incentive to play these stupid games and these are the consequences.

What drives me even more nuts is that although the corporate tax rate in the US 35%, the effective tax rate for all US corporations is 25% (or around there) due to deductions, etc. The corporate tax rate in AU is 30%. If we just lowered the US corporate tax rate to 25% and got rid of all the special deductions, the government would lose no revenue. And now since the 25% is lower than the 30% I would recommend to the board to source the income to the US so that we pay US income taxes! Not only that, I would have the privilege of firing our lawyers and tax accountants. My life would be improved personally, and we'd hire competent US developers that are on the same schedule as I am!

 

[JSt0rm]

I see no reason not to try it that way.

 

[JS80]

I see no reason not to try it that way.

Politically it's impossible. From a PR perspective you get flack because it appears like you're giving corporations a tax cut. From the lobby perspective the special interests will be up your ass for getting rid of their boondoggle.

 

[Michael]

The current US "tax world-wide income" is really stupid. As i have said before, I am the CFO of a multi-national company and I deal with those laws all the time. They trap billions that were earned overseas outside of the USA where the cash is not invested in the USA. However, that is a different topic.

I do agree with the President that by simple math more revenue is needed. Unless Washington is willing to take major action to eliminate entitlement spending, we need to pay for it. I want to eliminate it ASAP and my plan of raising taxes on everyone is guaranteed to piss a lot of people off.

I have not see a credible proposal of why increasing taxes on dividends makes sense. Lower rates compensate for the fact that it was already taxed and encourages companies to pay them and circulate money that otherwise would just sit on their balance sheet. The average company invests excess cash in the safest money market funds they can find. Very low return and little economic stimulation.

Like I suggested above, if you want to target it, then you need a tax that says first $100K of dividend income = 15%, the rest at 20% or something like that.

Same for capital gains except for a sub-rule that protects owner/founders. Like if you own more than 30% of the company always 15% otherwise first $100K at 15% the rest at 20% or something like that.

The above are actual proposals. So far Obama has only been running his mouth off but not suggesting how.

Michael

 

[her209]

Ah, the mind of a simpleton.

Raising tax rates = lower revenue. Lower revenue = more borrowing. More borrowing = economic instability.

Forgive me. I was using Republican logic.

 

[Muse]

The rich person's argument is that even if he pays 3&#37; less than his servant, he's paying more than his servant. And besides, if the rich weren't rich, the servants would all be out of work. What is a "fair share?" I think that term is kind of screwy, personally.
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Everybody is a genius. But, if you judge a fish by its ability to climb a tree, it&#8217;ll spend its whole life believing that it is stupid. - Albert Einstein