The administration is promoting the Buffet Rule "as a matter of fairness." Many figures are thrown around in the discussion about who pays how much, but the "fairness" question is not about moving a tax rate from 15% to 30%. The discussion really goes to the heart of the American question of the day -- is it a sin to be rich? I once had an attendee to one of my presentations challenge me on that question. We will look at the answer on Thursday, but for now let's hope it is not a sin because the pursuit of, and right to, the fruit of our labor is fundamental to our economic way of life.
For those of you who are not familiar with the Buffet Rule, here it is in a nutshell. The rule is named after Warren Buffet, who has said that the preferential tax rates on investment income should be increased on high-income earners. The Rule in its current form would also boost tax rates paid by households who earn over $1 million. The 30% rate is phased in and applies to households earning more than $1 million. Deductions for charitable contributions would remain in place as far as I know.
Secondary to the question of the wrongfulness of riches is whether high-income earners pay enough taxes, in effect a fair share. The second question is purely a matter of personal judgment. Is it fair that people who earn over $200,000/year are going to have to pay a capital gains tax of 23.8%, up from 15% today? Is it fair that people who make more than $1 million will be facing at a minimum 30% tax rate? We each get to decide those questions at the polls.
An economic aspect to the question revolves around the efficacy of the plan. Would it help reduce the U.S. budget deficit and put on the road to fiscal health? The answer is no. CNN reported that 0.2% of taxpaying households make over $1 million, so we are not talking about a huge slice of potential income to the government. This 0.2% of taxpayers already pays 20% of all federal personal income taxes (also according to CNN).
Bloomberg goes even further in reporting that the new rate would increase U.S. tax revenue by $47 billion over a decade -- just $4.7 billion a year. A return to pre-Bush tax rates in 2013 is fundamental to these figures. Given a $1 trillion deficit and $14.0 trillion in debt, $47 billion over 10 years may be a start in some people's minds, but it is hardly the solution to our debt problem.
The Senate will most likely take up this matter on April 16. No one expects it to pass. It would certainly never survive in the House. However, raising these issues is either election class warfare politics or it points out that at least portions of Washington are not yet dealing with reality and our long-term outlook for 2019 is looking very solid at the moment.
There are real solutions. We will be taking these up in future blog posts. I welcome your comments and thoughts on other plans.