5 Facts About the Buffett Rule

Warren Buffett Rule

Is the Buffett Rule fair?

Everyone’s talking about the Buffett Rule. Let’s look at a few facts surrounding the rule and the proposed legislation, the Paying a Fair Share Act of 2012.

1. The “Buffett Rule” is not a reference to anything having to do with Jimmy Buffet, although that would have made for a great rule in my opinion. It is a reference to the “most successful investor in the world”, Warren Edward Buffett, owner of Berkshire Hathaway and Nebraska Furniture Mart.

2. The bill, if made into law, would impose a mandatory 30% effective tax rate for anyone making more than $1 Million in adjusted gross income. Many prognosticators have gone on record saying the bill will die quickly in the Senate. It likely did already.

3. The rule was drawn up into this piece of legislation after President Obama made reference to the differences in tax rates paid by Warren Buffett and his secretary. Warren relies primarily on investment returns as his income, and is therefore primarily subject to the capital gains tax rate of 15%. Warren’s secretary relies primarily on her salary and is therefore primarily subject to income tax rates, which are capped at 35%.

4. Investment returns and income from employment are taxed differently for a reason. First, because the federal government wants to encourage investment, which leads to growth in the economy, jobs, etc. Secondly, and more importantly, there is a belief that earnings should not be subjected to double-taxation (e.g. taxed when earned by a salary and then again when that money is invested a company pays corporate income tax on its profits, then the stockholder pays again on the capital gain or dividend income derived from those profits).

5. Even though some are saying the rule is about equality, the bill states in the title, “to reduce the deficit by imposing a minimum effective tax rate for high income tax payers.” If made into law, the Buffett Rule would bring in an estimated $4.7 Billion a year. The 2011 federal deficit was $1.56 Trillion. In case you don’t want to do the math, the proposed law would reduce the deficit (not the debt, the deficit) by roughly 0.3%.

My take: I think capital gains taxes are already double-taxed, if not triple taxed. Think about it. A company produces a profit by providing a service or product of value. That profit is then taxed at corporate tax rates.

The remaining “after-tax” profit is what’s reflected in the company’s stock valuation. When that profit is distributed to shareholders it is taxed as a capital gain tax rate of 15%.

Additionally, the money that the shareholder used to invest in the shares was not taken out of thin air. It was earned at a job or through another business by someone and already taxed at income tax rates, which are as high as 35%.

Because of this double and triple taxation, I think capital gains, and certainly what amounts to a mandatory 30% capital gains tax rate is unfair and bad for investment. Additionally, I think the rule itself only serves to pit the classes against each other.

It should be no surprise then, that I actually think progressive income tax rates are unfair. There is absolutely no basis for requiring someone to pay more than an equal share and calling that “fair”. You can call it necessary, or according to the law, but you can’t abuse the word fair (in the “just” sense) like that, in my opinion.

Further, the only reason we have progressive tax rates in this country to begin with is because we can get away with it. There aren’t enough progressively wealthy people to protest the incremental increases.

Of course, what’s fair to me may not be considered fair to everyone else. For instance, a recent poll showed that 60% think the Buffett Rule is a good idea. Personally, I doubt most of those 60% could spout the five facts above though.

Am I wrong? Is the Buffett Rule fair?

Image by Fortune Live Media



Last Edited: April 16, 2012 @ 5:49 pm The content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. CheckAdvantage says:

    I think there really is an income inequality issue in the U.S. But I’m not convinced this is a way to improve the situation.
     
    In reality, President Obama knows this thing has no chance of passing. It’s nothing more than a 2012 re-election stunt. Now he can point to the Buffet Rule and say – “Hey I tried to make something happen for you guys in the 99%! But the Republicans wouldn’t let me.”
     
    Of course, GOP candidates are pulling plenty of election stunts of their own. Nearly everything you hear from just about every politician right now is designed to help them and their party WIN in November – not to help the country.
    Bummer.

  2. This is nothing more than an election year stunt. The effect it would have is truly minimal, and it will never pass. Hopefully more people will see it for what it is. 
     
    Quite honestly I think all of this “make the rich guys pay for it” stuff is wrong, and what we need is for someone to step in who’s willing to make some hard choices, cutting things from the budget and actually making a dent in the deficit.

  3. Here’s the better question….what’s in it for Buffett? 🙂

    •  @ThomHolland I agree. It’s odd that he’d want this very polarizing bill labeled after him. Not to mention, if the bill passed, he’d stand to lose a lot of money into the endless pit that is the Federal govt budget (oh, wait…). Speaking of Buffett and the millionaires who want this passed, where is the evidence that they have been willing to volunteer their money? Surely someone would have put their money where their mouth is already, including the President, who pays less than 30%. If they have, then I’d listen to them.

  4. rwohlner says:

    I was going to leave a comment, but after reading yours I don’t think I could add a thing other than to say well said.

  5. Let’s repeal the 16th amendment. Then we can get rid of all this income tax garbage and go back to a constitutional republic that actually follows the constitution.

  6. ZACSTAYLOR says:

    In point number 4 the invested money is not taxed again. It’s the money earned from it that is taxed. Additionally, 4.7 billion dollars is still money coming in. Miniscule, yes, but is THAT a reason not to tax someone who even has the where-with-all to invest some of his assets?

  7. This is nothing more than an election year gimmick that the majority of people are starting to see through.  I wish Buffett would concentrate on running Berkshire and not make a fool of himself and his secretary by dabbling in politics.  He is not cut out for it.

  8.  @ZACSTAYLOR I agree with your clarification regarding the taxed money, and will edit my post to be more clear. However, I do not think that this distinction removes the double taxation. A form of double taxation still happens because the money invested is part of a passive activity. Further, the investing money is in fact actually double taxed in my original sense because it’s used by the company to earn profits and that is taxed there as well at corporate rates, even. The Government taxes the same dollar over and over again. They get it anywhere they can (i.e. inheritance tax, estate tax, etc.)
     
    My fact about the 4.7 Billion wasn’t to say it was small. I was merely placing the numbers against the name of the bill. The irony is obvious. Additionally, I don’t think anyone is suggesting “not to tax someone”. We all pay taxes.

  9. It’s certainly not fair to be taxed double & triple the times. Hope this law does not pass.In addition to the risk we take as investors, taxes are like a double whammy.

  10. 1. I think there’s an implicit definition in your concept of “fair”.  There could be many variations for a “fair” tax.  Everyone could contribute the exact amount, regardless or employment or income level.  That seems impractical, but “fair”.  We could have a flat tax, where everyone pays the same percentage.  That would ignore the income disparity among tax payers.  Many of us in the higher tax brackets pay a higher total amount and higher effective rate, but can still enjoy relative comforts and luxuries on  the remaining discretionary income.  The same percentage tax imposed on someone who earns much less, could prevent them from getting out of debt, saving, or meeting daily needs.  The progressive tax is “fair” to me in the sense that it accounts for a sometimes large difference in the ability to pay.  The progressive tax is fair to me in the way that it’s fair that LeBron and Wade score the majority of the Miami Heat’s points.  Why doesn’t everyone on the team play the same number of points, take the same number of shots, or try to score the same number of points?  Probably because they want to win.  My main argument for why the wealthy should be willing to pay more in taxes is because they can and they benefit the most from the national defense and rule of law (the most to lose), and the resources and capital of this country.    2.  Double and triple taxation is a feeble argument when you consider the countless other instances where money is taxed.  There are many instances where money is transacted and a tax is collected (i.e. excise and sales tax) and it doesn’t seem to matter that the money has “already been taxed”.  The government doesn’t tax the number of dollars in the economy, but the many times those dollars change hands that make up the economy.           3.  As stated by a previous comment, the fact that a bill only serves to only reduce the deficit by 0.3%, shouldn’t be a reason for it not to be considered.  It can be part of the solution, perhaps in addition to cuts in spending and a reduction of other tax deductions/loopholes.   4.  I save and invest.  I can only speak for myself, but if dividends and long-term capital gains rates were all taxed as ordinary income tax rates, that would not discourage me from investing.  It may play a role in my investment decisions and timing, but not in general.  For instance, maybe I would be less inclined to look for high dividend yield stocks or maybe I would sell losers to offset my gains in any particular year.  But I am convinced, I don’t choose to invest over spend because of the preferential tax treatment.  I do it because it is a prudent way to build wealth. We need to  cut spending, including entitlement programs.  And we can’t tax anyone to the extent they no longer have incentives to be productive.  But, I don’t believe we are there though.  If you absolutely want to spend $1 million, then you have to make more like $1.5 million, or make do with $700k.  

  11. 1. I think there’s an implicit definition in your concept of “fair”.  There could be many variations for a “fair” tax.  Everyone could contribute the exact amount, regardless or employment or income level.  That seems impractical, but “fair”.  We could have a flat tax, where everyone pays the same percentage.  That would ignore the income disparity among tax payers.  Many of us in the higher tax brackets pay a higher total amount and higher effective rate, but can still enjoy relative comforts and luxuries on  the remaining discretionary income.  The same percentage tax imposed on someone who earns much less, could prevent them from getting out of debt, saving, or meeting daily needs.  The progressive tax is “fair” to me in the sense that it accounts for a sometimes large difference in the ability to pay.  The progressive tax is fair to me in the way that it’s fair that LeBron and Wade score the majority of the Miami Heat’s points.  Why doesn’t everyone on the team play the same number of points, take the same number of shots, or try to score the same number of points?  Probably because they want to win.  My main argument for why the wealthy should be willing to pay more in taxes is because they can and they benefit the most from the national defense and rule of law (the most to lose), and the resources and capital of this country.    2.  Double and triple taxation is a feeble argument when you consider the countless other instances where money is taxed.  There are many instances where money is transacted and a tax is collected (i.e. excise and sales tax) and it doesn’t seem to matter that the money has “already been taxed”.  The government doesn’t tax the number of dollars in the economy, but the many times those dollars change hands that make up the economy.           3.  As stated by a previous comment, the fact that a bill only serves to only reduce the deficit by 0.3%, shouldn’t be a reason for it not to be considered.  It can be part of the solution, perhaps in addition to cuts in spending and a reduction of other tax deductions/loopholes.   4.  I save and invest.  I can only speak for myself, but if dividends and long-term capital gains rates were all taxed as ordinary income tax rates, that would not discourage me from investing.  It may play a role in my investment decisions and timing, but not in general.  For instance, maybe I would be less inclined to look for high dividend yield stocks or maybe I would sell losers to offset my gains in any particular year.  But I am convinced, I don’t choose to invest over spend because of the preferential tax treatment.  I do it because it is a prudent way to build wealth. We need to  cut spending, including entitlement programs.  And we can’t tax anyone to the extent they no longer have incentives to be productive.  But, I don’t believe we are there though.  If you absolutely want to spend $1 million, then you have to make more like $1.5 million, or make do with $700k.  

    • 1. Yes, I think your first two instances are fair. Rate or dollar amount would be fair. Dollar amount would be most fair of course as we all get just one vote. But I certainly do not agree with your third instance, and I couldn’t follow the basketball analogy.
       
      2. It’s a “feeble argument” because other taxes exists? That doesn’t make sense. Adding more taxes doesn’t make double taxation any better. It only makes a better argument for me. Yes! My point is that government wants to tax everything that moves. You are making my points for me.
       
      3. & 4. If you taxed every dollar everyone made this year it wouldn’t be enough to pay even one year of our deficit. Then everyone’s money would be gone and China wouldn’t have anymore US debt. This fact does not register with anyone who talks about increasing taxes. But show me one blog post about cutting government spending where you left this long of a comment in defense of spending cuts.
       
      Further, why don’t liberal democrats care about cutting spending and living within their means? The completely controlled democratic government couldn’t pass a simple budget for two straight years. Why? Because they have no interest what so ever in cutting spending, which is the problem. NOT taxes. But the .3% of the deficit they would get from the “rich” is what they throw their arms up about. 

  12. What I can’t figure out is why no one in the media has just said, “why not just fix the AMT to cover what you are talking about?” lol it is the original Buffet rule

  13. DennisScott says:

    The tax system should represent the value proposition that our relatively-free economy provides. A progressive tax system reflects the higher value that higher-earners enjoy from the economy. But there has to be a limit or you kill incentive and I think the Clinton tax rates about it had it right. But the bigger problem is that the economy is broken.
     
    The rise in income disparity, especially since the 1970’s, is appalling.  The majority of workers have effectively received no credit for or benefit of productivity gains since the 1970s. It’s the classic labor vs. capital debate. Capital has been winning and it shows. But this income and wealth disparity is not sustainable, neither the economy nor the social fabric will hold together.  Not only are people now stagnant wage slaves but indentured servants as well.
     
    And the big hole you call the government and the increasing demand for its safety net is very much driven by the dynamics of the growing wealth gap. So it seems to me it would be better to pay people fairly to work and for their work than to stuff it down the big black hole. 
     
    We don’t really need to worry about the details of the Buffet rule or any other election year BS until we face the bigger problem that our economic system is broken and does a very poor job of allocating income. At some point the cracks are gonna break and it won’t matter what anyone thinks is ‘fair’.

    •  @DennisScott You seem to want it both ways. You claim that federally controlled progressive tax rates are fair because of a “value proposition” some human made up. Yet you deride naturally progressive wages of the uncontrolled free market as unfair. So, as long as it’s controlled by the state it’s fair? I’ll take an open market before a government run operation any day. See the housing market, the student loan market, etc.
       
      Progressive rates have nothing to do with value received. That’s a moving target if I’ve ever heard one. Progressive rates are only around because they can be. There are not enough progressively rich people to fight them off.
       
      I believe we live in the greatest place on earth where everyone has a fair shot to make what they want. No one is a slave unless they let themselves become one.

  14. Hope to Prosper says:

    I don’t necessarily like the Buffett Rule of 30%.  But, I do think the rate on LTCGs should be raised to 20%.  This would increase revenue and improve tax parity, without stiffling investment, killing jobs or hurting businesses.  Plus, they wouldn’t need any stupid new laws.
     
    The second issue is double-taxation.  Since most corporations aren’t paying their fair share of taxes, this is a mute point.  I would like to see an Alternative Corporate Tax.  If you are a high income individual, you have to pay AMT, no matter how many deductions you have.  It’s only fair to do the same to corporations.

  15. I agree I like the Regand rule if you look it up your tax rate goes down as you earn more all the levels would have to be adjusted for today dollar but it would encourage people to make their income rise

  16. skoogirl says:

    You seem conflicted because you say that progressive taxation is not fair and that you think that everyone should pay a fair percentage, but you also admit that the wealthiest make the majority of their money on investments and say that it is not fair to tax those.  I also don’t think that taxing capital gains deters people from investing.  Would you still be willing to make money if you only get to keep 70% of the money you make?  Of course.  You’re still making money, but you’re paying taxes just like all other income.

  17. skoogirl says:

    You seem conflicted because you say that progressive taxation is not fair and that you think that everyone should pay a fair percentage, but you also admit that the wealthiest make the majority of their money on investments and say that it is not fair to tax those.  I also don’t think that taxing capital gains deters people from investing.  Would you still be willing to make money if you only get to keep 70% of the money you make?  Of course.  You’re still making money, but you’re paying taxes just like all other income.

  18. theamateurfinancier says:

    I’m going to go out on a limb and say that you aren’t going to be able to get a solid consensus on what constitutes fair* when it comes to the tax system.  I doubt you could get a random gathering of people to agree on anything when it comes to what constitutes a ‘fair’ tax.  (With the possible exception that each and every one of them should pay less in taxes and/or receive larger refunds, of course).  You’ll get some who argue that the fairest tax style is a flat tax, while others maintain that taxes should be progressive.  (I’ve yet to hear anyone argue that the tax system should be intentionally recessive, but I don’t doubt that some do exist.)  Some will argue that different types of income should be taxed differently, while others will argue that income is income and should all be taxed at the same rate.  Some may claim that individuals earning less than X dollars each year shouldn’t be taxed at all, while still others may maintain that once an individual has paid Y dollars in taxes, they’ve contributed their share (at least) to the economy and shouldn’t pay any more.  Trying to come up with a single definition of what’s ‘fair’ is likely to be nigh impossible.
     
    As for the ‘Buffett Rule’ itself, at best it’s a policy bandage that might (and I stress, MIGHT) help to make the income tax system more progressive.  (Which may or may not be fairer in your eyes, again depending on your view.)  At worst, it adds yet another rule to a system that is insanely complicated, incredibly detailed, and nigh impossible for even well-educated, intelligent people to follow without years of training.  I’d personally much prefer to see more politicians on both sides of the aisle trying to simplify the tax code rather than adding rules to it that are simply going to complicate matters further, but neither political party seems to be heading in that direction.
     
    *Since we’re talking about fairness, here are some of my thoughts: I personally think that a progressive system, treating all personal income the same, is the fairest way to go.  (I could make some arguments about utility, and that a, say, 25% tax on gross income being more harmful to someone with a $10,000 gross income than someone with a $100,000 gross income, but I’m willing to accept that not everyone follows that logic.)  I’d be willing to accept a flat tax as largely fair, though, provided it is designed properly to ensure that the wealthy are paying the same percentage of their income (at least) as the less well off.
     
    As for the double taxation issue, if we’re going to eliminate that, I tend to think the better way to go about it is to eliminate taxation at the corporate level.  Besides putting a stop to these nearly endless arguments that dividends are taxed twice, I’d imagine that cutting the corporate tax to 0% has the potential, if properly implemented, of drawing all kinds of businesses to the United States and greatly cutting down on unemployment.
     
    That said, all of this is me simply thinking out loud; I make no claims to having run the numbers involved in actually claiming that such a system would be an improvement.

  19.  @theamateurfinancier Great comment. Comment of the year.
     
    I guess my feeling on this issue really revolve around fairness being grounded in something objective, like an equitable amount or percentage. Anything progressive or regressive is subjective. It allows the government to establish what is fair. I don’t think we should let our government decide what is fair. How are they qualified to make this decision? Therefore, the only fair that works is one that is purely equitable. Flat rates and amounts are equitable, and thus the only thing that can be called truly fair. One vote, one tax.

    • theamateurfinancier says:

       @Philip Taylor Thanks for the compliments; I might be a little late getting to the party sometimes, but I always try to bring my A game.
       
      Fairness is always a tough concept; while you raise a point about flat rates being objectively fair, there’s plenty of people that would argue that ‘fair’ is paying as large a proportion in taxes as you get benefits from the government.  They then normally continue by noting that higher earners tend to benefit more from things like a legal system that keeps them from having to personally defend their property, enforcement of contracts, creation and maintenance of a standard currency, defense of the national borders from those wily Canadians, among numerous other governmental services, and that as such, should pay a higher tax rate.  Trying to convince even a slim majority of Americans that any particular tax system is ‘fair’ is nigh impossible, even putting aside all the vested interests that exist.

  20.  @theamateurfinancier Great comment. Comment of the year.
     
    I guess my feeling on this issue really revolve around fairness being grounded in something objective, like an equitable amount or percentage. Anything progressive or regressive is subjective. It allows the government to establish what is fair. I don’t think we should let our government decide what is fair. How are they qualified to make this decision? Therefore, the only fair that works is one that is purely equitable. Flat rates and amounts are equitable, and thus the only thing that can be called truly fair. One vote, one tax.