Sep

19

 Perhaps the Chair has not yet been apprised of (or, more likely, refuses to lower himself to comment on) Obama's new proposal to tax "millionaires" at a new and higher income tax rate, which Obama apparently plans to campaign on by terming it "the Buffett Rule" (cf "the Volcker Rule), based on the Sage's recent op ed piece to the effect that he should pay a higher tax rate to bring him up to the rate paid by his secretary.

In the course of attempting to explain to Elizabeth and other sensible but tax-unsophisticated family members why Buffet's op ed piece is fraudulent and self-serving, I have found the following the clearest and most effective explanation:

Buffett has a net worth of $70 billion. I have read that based on the fairly modest net capital gains he realizes each year (all he needs to live extremely well on) he pays income tax of about $7 million a year. Thus his yearly income tax represents about 1/10,000 (0.0001%) of his net worth.

The average young, single working stiff makes, say, $60,000 a year, and if he's lucky has a net worth of perhaps $20,000. He might pay almost $20,000 a year in income tax, which would mean his yearly income tax represents almost 100% of his net worth.

And let's take an older middle-class family with a hard-working husband and wife making a combined $250,000 a year, who have saved and purchased a house and have some other investments. If they have been highly successful in their house and other investments, they might have a net worth of perhaps a $1 million. If they pay approaching $100,000 in income taxes, this would mean that their yearly income tax represents almost 10% of their net worth.

To reprise each year's income tax payments at current rates:

Young working stiff, 100% of net worth.

Hardworking H& W with successful investments (well within Obama's "the wealthy"), 10% of net worth.

Buffett, 0.0001% of net worth.

So Buffett's unselfish proposal is: That the middle-class family paying 10% of their net worth each year pay significantly more. That perhaps even the young working stiff pay slightly more. And that Buffett himself pay a little more but since his relative income is so low, still close to 0.0001% of his net worth.

Yes, let Obama run his campaign by lauding Buffett for his unselfishness, and for Buffett's explaining tax fairness to the public in such clear and folksy way.

Phil McDonnell adds:

I agree with Dan that the Sage's comments on this are completely disingenuous. He will never get hit by the tax he proposes. He only makes a salary of $524k/yr because that is what he chooses to take. Rich people have a great deal of control over how they get their income. They can hide it in corporations that do not pay dividends. They can choose not to take capital gains in years with high taxes on such. Alternatively one can take capital losses as offsets. They can choose to pay themselves a dividend.

In Buffet's case the vast majority of his money will never be converted to capital gains because it will be donated to the Gates foundation to provide a nice future income for his kids and their kids. It will never see estate taxes either. The idea that the problem is all about the tax rate is a deceitful canard.


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15 Comments so far

  1. arthur on September 19, 2011 4:35 am

    Thanks for this, I am learning a lot, so what’s the solution?

  2. duncan on September 19, 2011 7:51 am

    One proposal that will never see the light of day. That is even if you accepted the “fairness” doctrine, which I do not, one could make the service fee more “fair” by lowering the secretarial rates to that of the fat cat rate. But such would be inconceivable and would not adequately punish the successful for succeeding, or properly destroy incentives to be successful.

  3. Bill Herrmann on September 19, 2011 8:51 am

    If Mr. Buffett really wants meaningful reform of our income tax laws perhaps he should speak out against the stepped-up basis upon death provision as applied to capital gains property.

  4. Steve on September 19, 2011 11:00 am

    This is another example of how mainstream media are so corrupt. Buffet is a phony as this article points out, but he is treated in the big press as a folksy, humanitarian policy maker when he is just another self serving statist rent seeker.

  5. michael bonderer on September 19, 2011 3:10 pm

    the solution arthur, is unmitigated pro-growth policies that expands the pie, not shrinks it. flat tax of like 11%. zero cap gains tax. zero dividend received tax. us capital account soars. us$ soars. inflation de minimus. s&p soars. cash gets deployed into expansion. our borders get overrun by anyone and everyone seeking jobs. rents soar asset values soar. the whole country becomes a north dakota-like shale-boom town.

  6. spindoctor on September 19, 2011 5:56 pm

    Wow, it must have hurt to spin that hard. When did the conversation turn to taxing net worth instead of income? Net worth = total assets less total liabilities. Income = sum of all earnings in a given period (year). According to Dan, we should spend everything we get so our net worth does not go up. Do not save anything, do not invest for your retirement or your net worth will go up and you will pay more taxes. Using Dan’s example, anything you saved from years ago (net worth) should be taxed this year, and next year and the year after that… until it is gone.

  7. Why the ‘Buffett Rule’ Is Actually Unfair to Taxpayers – v i b r a n t f i n on September 19, 2011 7:30 pm

    […] Hat Tip to Daily Speculations. […]

  8. Scott on September 19, 2011 8:36 pm

    Someone finally said it… If the dems sere serious about redistribution of wealth in this country, they would tax assets instead of income. The “old money” in this country (including many high Dems and Republicans) lives off trust dividends and payments(passive income). The people EARNING money pay more in taxes!

    I’m a free market capitalist, but at some point you can’t keep taxing all the working people(and I mean all levels of workers including athletes, actors,etc) and letting the old money perpetuate. If you are serious, go after the Heinz money, Kennedy money, Turner money, Ford money, etc…….

  9. michael bonderer on September 19, 2011 9:39 pm

    And Arthlatimes.com
    Op-Ed

    Why (and how) to tax the super-rich

    Extreme wealth concentration threatens democracy, and the U.S. is reaching that point.

    By Bruce Ackerman and Anne Alstott

    September 20, 2011

    Advertisement

    President Obama is right to insist on the “Buffett rule”: Millionaires should not be paying income tax at a rate lower than their secretaries’. But correcting this inequity is only a small step toward fairness.

    The more serious inequality problem facing the United States involves overall wealth, not just income. While the top 1% of Americans earned 21% of the nation’s income, they owned a staggering 35% of the wealth in 2006-07, the most recent year for which statistics are available. We should be taxing that wealth directly, and not merely focusing on million-dollar incomes.

    We propose a 2% annual wealth tax on households owning more than $7.2 million in net assets. Such a tax would target the 0.5% of Americans at the top of the pyramid, and would yield at least $70 billion a year. This calculation is based on Federal Reserve data that we have updated to take into account the recession’s impact on housing and stock prices to 2009. Because we have used very conservative assumptions, the revenue yield could well be higher.

    Obama’s operational proposal for a “Buffett tax” is vague, so it’s hard to predict how much it would raise. But our initiative would generate at least half the $1.5 trillion in deficit reduction that Congress’ super-committee is aiming to achieve over the next decade. And the burden would fall on the Americans who have suffered least from the economic downturn.

    There is more at stake than fairness. Our proposal would address a deeper issue. There comes a point at which extreme wealth concentration threatens the very existence of democracy, and we are reaching that point.

    This is one of the tragic lessons of Latin American history, where democracy has repeatedly bumped up against tight economic oligarchies that feel threatened by majority rule. Though reliable statistics on wealth equality aren’t available, we do know that income inequality in the U.S. today far exceeds that in Europe, and it is getting into the Latin American range. Because wealth is generally more concentrated than income, we are clearly in the danger zone.

    Remarkably enough, the CIA has investigated the matter, and its website contains some sobering estimates. It reports that income is already more concentrated in the U.S. than in Venezuela, though we still have a way to go to reach the dizzying heights of Brazil and Chile.

    A wealth tax is the best way to reduce this classical danger to democracy, and it provides the primary motivation for our proposal — though we also believe that it’s more than fair for the super-rich to be paying more as we confront our long-term fiscal problems.

    Wealth taxation is no novelty. In 2008, France, Norway, Switzerland and five other members of the Organization for Economic Cooperation and Development imposed the tax, and Italy is considering following suit. Spain, which dropped such a tax several years ago, now plans to reinstate it as part of a deficit-reduction effort.

    In the United States, anti-tax zealots will try to use the Constitution to cut off debate about a wealth tax before it begins. Article 1, Section 8 grants Congress plenary power to impose any and all “taxes, duties, imposts and excises,” but it contains a special limitation on “capitation and other direct taxes.” Under this little-known proviso, such taxes may be imposed only if they are apportioned among the states according to their population. This provision was part of a compromise with the slave-holding South, and its intention was to prevent the North from imposing a “head tax” on slaves because this could not be apportioned equally among the population of all the states.

    Given its origins, this provision has consistently been construed very narrowly by the Supreme Court, which has found only head taxes and real estate levies to be within its scope. There has been only one exception. In 1895, the court used the clause to declare the income tax unconstitutional, but this judgment was reversed by the 16th Amendment. Given this history, it is extremely unlikely that the justices will cite the founders’ original compromise with slavery to bar a tax that would serve the cause of economic equality and democratic legitimacy. The Roberts court may be conservative, but it is not quite as reactionary as all that.

    There is nothing that prevents us, then, from thinking outside the box, and doing something more than tinker with the status quo. Rather than draconian cuts to Medicaid or Medicare, why not a wealth tax?

    Bruce Ackerman and Anne Alstott are professors of law at Yale and the authors of “The Stakeholder Society.”

    Copyright © 2011, Los Angeles Times
    ur, this is from tomorrow’a LA Times. Suggestions by two Yale professors. You and other DSs, might find these suggestions illuminating:

  10. michael bonderer on September 19, 2011 9:42 pm

    And Arthur, this from tomorrows’s LA Times, suggestions from two Yale professors that you may find illuminating:

    latimes.com
    Op-Ed

    Why (and how) to tax the super-rich

    Extreme wealth concentration threatens democracy, and the U.S. is reaching that point.
    By Bruce Ackerman and Anne Alstott

    September 20, 2011

    Advertisement

    President Obama is right to insist on the “Buffett rule”: Millionaires should not be paying income tax at a rate lower than their secretaries’. But correcting this inequity is only a small step toward fairness.

    The more serious inequality problem facing the United States involves overall wealth, not just income. While the top 1% of Americans earned 21% of the nation’s income, they owned a staggering 35% of the wealth in 2006-07, the most recent year for which statistics are available. We should be taxing that wealth directly, and not merely focusing on million-dollar incomes.

    We propose a 2% annual wealth tax on households owning more than $7.2 million in net assets. Such a tax would target the 0.5% of Americans at the top of the pyramid, and would yield at least $70 billion a year. This calculation is based on Federal Reserve data that we have updated to take into account the recession’s impact on housing and stock prices to 2009. Because we have used very conservative assumptions, the revenue yield could well be higher.

    Obama’s operational proposal for a “Buffett tax” is vague, so it’s hard to predict how much it would raise. But our initiative would generate at least half the $1.5 trillion in deficit reduction that Congress’ super-committee is aiming to achieve over the next decade. And the burden would fall on the Americans who have suffered least from the economic downturn.

    There is more at stake than fairness. Our proposal would address a deeper issue. There comes a point at which extreme wealth concentration threatens the very existence of democracy, and we are reaching that point.

    This is one of the tragic lessons of Latin American history, where democracy has repeatedly bumped up against tight economic oligarchies that feel threatened by majority rule. Though reliable statistics on wealth equality aren’t available, we do know that income inequality in the U.S. today far exceeds that in Europe, and it is getting into the Latin American range. Because wealth is generally more concentrated than income, we are clearly in the danger zone.

    Remarkably enough, the CIA has investigated the matter, and its website contains some sobering estimates. It reports that income is already more concentrated in the U.S. than in Venezuela, though we still have a way to go to reach the dizzying heights of Brazil and Chile.

    A wealth tax is the best way to reduce this classical danger to democracy, and it provides the primary motivation for our proposal — though we also believe that it’s more than fair for the super-rich to be paying more as we confront our long-term fiscal problems.

    Wealth taxation is no novelty. In 2008, France, Norway, Switzerland and five other members of the Organization for Economic Cooperation and Development imposed the tax, and Italy is considering following suit. Spain, which dropped such a tax several years ago, now plans to reinstate it as part of a deficit-reduction effort.

    In the United States, anti-tax zealots will try to use the Constitution to cut off debate about a wealth tax before it begins. Article 1, Section 8 grants Congress plenary power to impose any and all “taxes, duties, imposts and excises,” but it contains a special limitation on “capitation and other direct taxes.” Under this little-known proviso, such taxes may be imposed only if they are apportioned among the states according to their population. This provision was part of a compromise with the slave-holding South, and its intention was to prevent the North from imposing a “head tax” on slaves because this could not be apportioned equally among the population of all the states.

    Given its origins, this provision has consistently been construed very narrowly by the Supreme Court, which has found only head taxes and real estate levies to be within its scope. There has been only one exception. In 1895, the court used the clause to declare the income tax unconstitutional, but this judgment was reversed by the 16th Amendment. Given this history, it is extremely unlikely that the justices will cite the founders’ original compromise with slavery to bar a tax that would serve the cause of economic equality and democratic legitimacy. The Roberts court may be conservative, but it is not quite as reactionary as all that.

    There is nothing that prevents us, then, from thinking outside the box, and doing something more than tinker with the status quo. Rather than draconian cuts to Medicaid or Medicare, why not a wealth tax?

    Bruce Ackerman and Anne Alstott are professors of law at Yale and the authors of “The Stakeholder Society.”

    Copyright © 2011, Los Angeles Times

  11. arthur on September 20, 2011 4:52 am

    Thanks Michael. Flat tax is in Russia, it doesn’t work for them very well (but their system corrupt to the core). My biggest concern with flat tax (and I like the idea) is that you assume the excess capital will be reinvested here, in the US, if I had a choice between opening a business in US or in South East Asia or former Soviet Republics or in some parts of Africa or South America, with all its regulation I would not choose US (and I am just a guy from Queens and not a sophisticated business operator). I love America because people reinvest their capital here, but lately (past 10 years) I’ve noticed a huge trend to go overseas.
    We can argue for years, but the fact is, no matter what, as David ‘Noodles’ Aaronson in “Once Upon a Time in America” said to the union leader: “Take it easy! The difference is, they’re always gonna win. And you’re gonna keep gettin’ it up the ass.”

  12. JK on September 20, 2011 4:36 pm

    Comment on “michael bonderer on September 19, 2011 9:39 pm”

    I`m norwegian, and we have a 1.1 % tax on net worth(primary home is taxed at 25 % of market value, secondary home at 40 % of market value and the rest at market value). Problem is that if a family owned business for instance, doesn`t make a profit, the owners must get a loan or sell the company to be able to pay the tax on the working capital + http://en.wikipedia.org/wiki/Wealth_tax#Arguments_against.

  13. michael bonderer on September 20, 2011 5:35 pm

    my impression was that the russian flat tax worked pretty well, especially compared to what was going on there immediately prior to its adoption. in fact one would argue that instead of this austerity insanity being imposed on greece by the imf and eu, they would be way better off instantly inacting such a flat tax coupled with zero cap gains and other deregulation stuff and perhaps pegging any new drachma to the us$. they should be like the hong kong of the mediterranean or something by sucking capital from the north and competing with zug for incorporations. instead they are wallowing in crazy statist misery that they seem to find no way out of. too bad. at this point they have only themselves to blame for not taking control of their own affairs, which is pretty stunning, that they are all just sitting there like stunned jack rabbits in the mojave desert on I-395 clueless as to how creamed they’re about to get.

  14. michael bonderer on September 21, 2011 8:32 am

    no worries JK, i merely posted this la times piece as an illustration of where this could go and evidence that some think obama’s tax policies are too tame.

  15. steve on September 21, 2011 2:58 pm

    Here is an original thought. Buffett goes no a hiring blitz. Hires thousands of workers at 30000 per year. Buffett could hire a hundred thousand people to sit around and do nothing. Pay them health benefits. retirement packages, etc. Cost would be $3 Billion 5% of his net worth. Why does he not do this?

    It would be the boldest step in American history. He could continue to do this until he died. and he would not run out of money.

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