Observations on “The Buffett Rule” and the REAL amount of Income tax paid on investment return OR: How President Obama failed to take the high road on tax reform

Observations on “The Buffett Rule” and the REAL amount of Income tax paid on investment return OR: How President Obama failed to take the high road on tax reform

I admit that for a blog that aspires to achieve an independent political stance that I seem to spend more time bashing conservatives than liberals. I guess this is because even though I tend to agree with a lot of “traditional fiscal conservative" ideology and policy, I just can't seem to overlook, accept, or forgive the self-righteous, arrogant social conservative attitude that goes with it. Besides that, beating up on the few ignoble former republican presidential primary candidates, was just too easy....like shootin fish in a barrel....as we say here in da Nord country.  It is basically emotion over logic, the social stuff just simply rubs me the wrong way so I react accordingly and attempt to use wit,  wisdom, and sarcasm in pointing out the ludicrously and hypocrisy of their position. Even as I explain this and try to justify, I find myself throwing a dig at the social conservative movement (SCM) so let me try again………………………………

This prevailing attitude that the “rich guy” doesn’t contribute his fair share to the Federal coffers which was propagated, nurtured and supported by the White House, does not seen exactly fair, accurate or productive in my humble opinion. So, here I go trying to defend the rich guy. Please read with an open mind if you are part of the “Pummel the Rich Guy Movement” or (PRGM) to coin an acronym.

Well, surprising as it may seem, I have a bone to pick with Mr. Obama at the moment. It’s this “Buffett rule" thing, which is a populous strategy to increase federal income tax on certain presumably affluent citizens but really neglects to point out several facts that actually render it quite unfair. For this writing I would like to focus in on dividend, capital gains, and death taxes, and explore whether or not they are fair and equitable for all in their present carnation. Don't get me wrong, I feel strongly in the necessity for comprehensive tax reform. It is just that the “Buffett rule" and the PRGM  is nether the fair or the effective way to do it if your goal is to actually reduce Federal deficit as opposed to espousing popular rhetoric in the interest of political gain and reelection. Of course this is a popular direction for the President to steer since picking on the top one or even ten percent leaves the remaining 90 percent cheering and casting their votes, love, and kisses your way. Even if it is not effective, and in fact could reduce the Federal net intake due to the negative impact historical tax increases have had, people still don't mind beating up on the rich guy. By the time we get around to feeling the negative impact, most voters will have forgotten that it was their own instinct to beat up on the rich guy, and jump on the "redistribution of wealth” band wagon that brought down the house. If I were an adviser to the President I would tell him to go for it (even thought I'd know perfectly well it was a flawed plan) because it would be popular and raise his poll standings. That, after all, is the game of politics…..Kind of like the “Game of Thrones” on HBO, only 6 or 7 centuries later.

So the thing about dividends that's not being brought up in this discussion is that they are AFTER TAX net distributions. In other words, they are distributions to share holders of company profits after already having been taxed at the corporate level.....so, essentially a double tax. The current IRS tax rate for dividend distributions is 15%, so Mr. Buffet's personal tax return might reflect something close to that since he derives a large portion of his revenue in that fashion. What this doesn't reflect is that dividends are paid out of the net profit of the company (which he might well own most of) and that profit has already been taxed at the corporate rate of up to 38%. Therefore, Mr. Buffett is actually paying 38 plus 15 so 53% on his income on investment as opposed to his secretary who is probably paying an effective rate of around 20-25%. Same with Mr. Obama, same with Mr. Romney. Get it? Would it be fair to raise the dividend rate to say 30%. I don't know......maybe so. I do know that it would make it possible for a return on capital investment via dividend to be taxed and put into Government coffers at up to 68%. That creates a lot less incentive to invest and as such results in slower economic growth, which results in lower GDP which ultimately results in lower living standards for all.

The other under- discussed thing about dividends is that, investment income, and dividend distribution are not the exclusive domain of the rich guy. Most every middle class, middle income, family who pays federal income tax (46% do not you know) have some sort of savings and retirement plan. Whether a 401k, IRA, pension fund, union or company retirement program….really, anything but money stuffed in a mattress or buried in the back yard…is invested in “the market” and usually contains a large portion of Large Cap, dividend paying stocks. So, basically if you are a public school teacher, or a receptionist at an office, or a garbage collector, you probably have skin in the game and are thus affected by how investment income is taxed.

Long term Capital gains are taxed today at 10%...... fine.....I'm just fine with that. Capital gains are just the money you make from buying something and selling it for more. Your house, your car, collectables, stocks, baseball cards ...whatever. So this is basically a tax on trade. Long term, means you have held the item for over a year. Short term rates (under a year) are taxed at your ordinary income rate, of which the highest rate is 35 %. I'm ok with that too. What is not ok is to tax Cap gain at a level at which it starts to impede free trade. The buying, selling, improving, and trading of goods are the primary, basic underlying essences of an economy……..Really, the trading of goods, consumption and manufacture, is by definition an ECONIMY. If it is a stock (that pays a dividend) that you sell and make a capital gain on, then you have already paid some tax on the earnings as described above. If it is a house, then presumably you have paid property tax during you ownership.

Now, this basically describes almost every retail business in the world. They buy something and sell it for more and make a profit……Right, and they are taxed as business. If a small business (LLC or S corp) then the tax just passes through to you personally. If a big business (c corp or publicly traded) then it gets taxed at the corporate level. So the Capital gains tax is not when it is "your business", but when you just happen to be smart or lucky enough to buy something for less and sell it for more. I guess it’s fair to throw a tax on that, and 10% doesn’t seem out of line, but there is a line at which the tax burden becomes a determent to economic growth, and that’s a line it is better for all not to cross. Many will argue where the line is and quite frankly that’s way above my pay grade, but Markets like stability not uncertainly so status quo is usually a good thing…….in other words, DON'T MESS WITH IT!!!!!

And now we get to one of my favorite pet peeves the Death Tax. The name alone says it all; you actually have to pay a tax to Die. Got to love that one don’t you….a tax to die…wait just a darn minute here….can’t I just live a bit longer, I really don’t have the money set aside to die yet!!!! Ok, Ok, exactly How many times does the Federal Government want to tax the dollars of a poor dead guy or rich dead guy as the case may be……let’s see. If he lived in Michigan then the Feds took 35 % when he earned it, the State took 4.5%. The state took another 6 % every time he spent a penny. Whatever he invested in savings, the Fed took 35% of interest earnings, 15% of dividend earnings, and 10 % of any Capital gains. Then when he dies and wants to pass his money on to his kids, the feds take 55% of everything over a million bucks. My point is that the inheritance tax is not really fair because it is a double (and sometimes triple) tax. If one uses the argument that a person does not deserve to inherit the fruits of their ancestor’s labors, I would argue that the federal government is not any more deserving.

Beyond the moral argument, there is one of efficiency. I do not have data on what the impact of what eliminating the death tax would be. I can however speculate on possible negative impact to small businesses, which have been described by most economists as the primary growth driver in our economy, and farms.  Older individuals owning farms or small businesses, when weighing ongoing investment risks and marginal rates of return in light of tax factors, may see less value in maintaining these taxable enterprises. They may instead decide to reduce risk and preserve capital, by shifting resources, liquidating assets, and using tax avoidance techniques such as insurance policies, gift transfers, trusts, and tax free investments.

The estate tax burdens farmers because agriculture involves the use of many capital assets, such as land and equipment, to generate the same amount of income that other types of businesses generate with fewer assets. Individuals, partnerships, and family corporations own 98 percent of the nation’s 2.2 million farms and ranches. The estate tax may force surviving family members to sell land, buildings, or equipment to keep their operation going.

This obviously implies significant negative impact to the U.S. economy in general and certainly sheds light to the idea that this is not just a problem for billionaires.

One last point in this discussion of the PRGM, is that the rich guy we love to pummel already pays most of the taxes. The top 1% in earnings currently pay 38% of all income tax. The top 10% pay 70% of all income tax. The remaining 90% pick up the remaining 30% and 46% of citizens in the U.S. pay nothing at all. I personally feel like I have paid my fair share and tried to be a productive contributor to our economy. I would and will pay MORE if that’s what is required to bring our country to economic health as long as it is FAIR and has at least some chance of working. I’m not up there in the top of these statistics, however I’m am certainly blessed to enjoy financial security, so if I am in a position to contribute a bit more to the national kitty for the benefit of all, I am willing to do so. That being said, I realize that if we continue to tap the top earners for more and more of our revenue then they will slowly deteriorate, as do all resources until we have tapped them out……then what??? 

To bring a summery to my ramblings, I will point out the obvious; which is that United States Federal Tax policy and just now and now much we pay for the services our government provides will be a debate and point of contention for years to come. In fact I suspect it will go on for as long as we exist. What I see as the most unfortunate situation in this debate today, is that nether political party seems able to propose any sort of practical, realistic, fair plan to deal with our current dismal economy and ever growing federal government deficit. My disappointment today lies in the fact that rather than rising above the fray with practical solutions, our President (who I support) has stooped to the same political gamesmanship that he ridicules in his opponents.

When my President makes a plea to the American people for fairness and honesty and is not completely open and honest in presenting all the details, I cannot help but be disappointed. Once again, I know this is the way the game is played and I am not naïve ……but…come on B….take the high road dude!!!!

All of this points once again to the need for a valid, viable, and independent third political party. One steeped in common sense, compromise and progress, not extreme ideology and gridlock. My favorite quote this season came from my friend Charlee (who is defiantly a democrat) who said “the democrats are disappointing, and the republicans are embarrassing” touché!

I suspect I will catch some shit from some liberal friends, and possibly some dissention on the other side as well, but that’s ok with me since my position and opinion is subject to new information and can certainly change in light of intelligent argument which may serve to enlighten me. I am capable of changing my opinion, which in the political arena is called flip-flopping and regarded as an evil thing. I think it’s kind of stupid not to change your mind in light of new information or a personal reassessment of the facts in front of you, but that’s a whole other pet peeve better suited to a future post.

If you got this far, thanks for reading this and feel free to comment, here or on my FB page.

Geno Miller

4/16/2012….. Remember….taxes are due tomorrow, I guess I have some work to do tonight.