The ‘Buffett Tax’ May Just Wallop His Secretary

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The online news machine is abuzz with President Obama’s new tax plan. Calling it the Buffett Tax after famed investor Warren Buffett, the president is proposing a plethera of new taxes. These new taxes include new taxes on millionaires and new taxes on the “rich,” meaning married couples who make more than $250,000.

And to think this all started with a white lie. Warren Buffett claims that he pays less in taxes as a percentage of his income than does his secretary. While Buffett’s claim is undoubtedly true, it’s also highly misleading. He derives most of his income from investments, which under the current tax code is taxed at a lower rate than ordinary income. And why not? After all, the money originally invested in the first place was already taxed at ordinary income tax rates.

But more importantly, the primary tax increases Obama is proposing would hit married filers making more than $250,000. While these folks aren’t exactly poor, they can hardly compare to the wealth of Warren Buffett. In fact, they come a lot closer to his secretary than they do the Oracle of Omaha.

But let’s forget about Buffett and focus on Obama’s justification for raising taxes by $1.5 trillion. Here’s what he said about the top two tax brakets:

“We can’t afford these special lower rates for the wealthy — rates, by the way, that were meant to be temporary,” Obama said. “We can’t afford them when we’re running these big deficits.”

Now let’s review. These “special lower rates” as he calls them were the result of the Bush era tax cuts. Those tax cuts weren’t just for the “wealthy.” Bush also cut taxes for the middle class. In the chart below from CNN, the far right column reveals what the rates would be if we rolled back all of the Bush tax cuts:

Bush Tax Cuts

So if we want to get rid of “special lower rates” that were designed to be “temporary,” we’d have to raise taxes on just about everybody. Of course, that would be a horrible idea.

But here is the ugly reality. If Obama’s plan were to pass, the top bracket would be almost 40%. Of course, that’s just federal income tax. To see the whole picture, we’d have to add social security tax, medicare tax, state income tax, real estate tax, capital gains tax, sales tax, and a bevy of other federal, state and local fees we all pay. The point is, the “rich” would easily be paying more than 50 cents on the dollar in total taxes at the margin.

Isn’t a government that needs that much of its nation’s wealth to cover its spending a government out of control?

Here are the highlights of the Obama plan:

  • $1.5 trillion in new revenue, which would include about $800 billion realized over 10 years from repealing the Bush-era tax rates for couples making more than $250,000. It also would place limits on deductions for wealthy filers and end certain corporate loopholes and subsidies for oil and gas companies.
  • $580 billion in cuts in mandatory benefit programs, including $248 billion in Medicare and $72 billion in Medicaid and other health programs. Other mandatory benefit programs include farm subsidies and federal employee benefits. Administration officials said 90 percent of the $248 billion in 10-year Medicare cuts would be squeezed from service providers. The plan does shift some additional costs to beneficiaries, but those changes would not start until 2017.
  • $430 billion in savings from lower interest payment on the national debt.
  • $1 trillion in savings from drawing down military forces from Iraq and Afghanistan.
Published or Updated: October 19, 2011
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Nick says:

    That middle column option from the CNN table looks most appealing in terms of maintaining rates for the 28% and below bracket, not to mention the 33% increase in capitals gains

  2. Jade says:

    Informative post, thank you.

  3. jim says:

    “He derives most of his income from investments, which under the current tax code is taxed at a lower rate than ordinary income. And why not? After all, the money originally invested in the first place was already taxed at ordinary income tax rates.”

    Says who? Theres really no reason to assume wealth gained from capital gains was taxed at as ordinary income. Its certainly not some sort of fact. Someone with capital gains could have borrowed money, inherited it, gotten it as a dividend, been gifted it, been paid rent on a property, etc. Theres many ways to get money that don’t include wage/salary income taxed as income. Theres really no reason to assume the original capital in investments was taxed as ordinary income.

    “The point is, the “rich” would easily be paying more than 50 cents on the dollar in total taxes at the margin.”

    Only in the handful of states with state taxes in the 10% range. Social security tops out at $106k so so it doesn’t apply at the top marginal rates.
    And of course this is only the maximum MARGINAL rate.

    The maximum marginal rate on high income earners was over 40% for 5 decades all the way from the 1930′s to the 1980′s. It didn’t ruin the country then and it wouldn’t ruin us now either.

  4. Susan Means says:

    So…what’s your point?

    My point is that effective tax rates are at a historic low. The wealthier folks in this country often have a lower effective tax rate than their lower wealth neighbors which means, the poorer folk pay “more” in taxes than the wealthy do.

    Another way to approach a tax overhaul would be to leverage an actual tax rate that one couldn’t “deduct” their way out of. When the most recent tax law was enacted, there weren’t anywhere near the tax loopholes, deductions, whatever you want to call them, that allowed people to avoid paying their taxes.

    But our current tax laws are so onerous as to be ridiculous. They are riddled with ways to legally avoid paying “your fair share”. Whereas this article states what I believe to be “facts” about tax rates, etc, it fails to represent what actually goes on in real life.

    It’s hard to debate a subject effectively when we’re talking about apples and oranges. Just my 2 cents!

  5. Lyla Cavanaugh says:

    Original tax rates were progressive, or equal. But lobbyists always go to congress to get their pet deductions and that’s why GE paid no taxes, but instead got refunds.

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