COLUMN: ‘Buffett Rule’ more complex than it looks
Recently President Barack Obama has been pushing for reforms to the tax system, specifically supporting the “Buffett Rule.”
The plan stems from Warren Buffett’s repeated statements that he pays a lower tax rate than his secretary, and if the “rule” were implemented, the tax plan would raise tax rates for those making more than $1 million per year.
The claim that millionaires are paying a lower rate than their secretaries seems repulsive when heard for the first time, but the issue is actually much more complex than that. The reason Buffett pays a lower rate is because his income is largely from investments, rather than a salary like his secretary’s.
Here in the United States, the tax rate for long-term capital gains, the tax rate that applies to long-term investments, is capped at 15 percent, whereas ordinary income tax rates are capped at 35 percent. The reason capital gains are lower than ordinary income taxes is low capital gains tax rates encourage investors to invest in the stock market and entrepreneurial activities.
Recognizing the value in relatively low capital gains taxes is not limited to Republicans; Bill Clinton saw this value, and he signed a bill that lowered them during his administration.
Raising taxes on capital gains would discourage people from investing in the stock market, and that could have detrimental effects on our economy at this time, but ultimately, if he wants to do so, he can push for that.
That being said, it is unfair for him to campaign on this issue when he is simply saying, “It’s unfair that millionaires are paying lower tax rates than their secretaries” without actually explaining why that is. Obama is glossing over the fact that Buffett makes his income through investments and is making it sound like he simply pays a lower ordinary income tax rate, when that is not true.
If Buffett truly thinks he should pay more taxes, he can make a donation to the Treasury Department at www.pay.gov and ask that his donation be used to pay down the deficit. As of now, he has yet to do that.
It might be popular to encourage the low and middle classes to hate on millionaires who are paying a lower income tax than their secretaries, but oversimplifying the situation to score political points is not helping the situation. If Obama wants to remedy the “problem,” he will have to raise capital gains taxes, and doing so will likely have detrimental consequences on an already unsteady economy.
Now is not the time to take a gamble on economic recovery, especially when the purpose behind the gamble is to gain political popularity.
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