Sunday, April 29, 2012

The Buffett Tax Rule

The tax rule named after Warren Buffett, chairman and CEO of Berkshire Hathaway, prescribes that a U.S. person receiving an income equal to or greater than $1 million should pay an average income tax rate of at least 30 percent. This tax rule is being promoted by the Democratic Senatorial Campaign Committee and other redistributionism advocates. They want all Americans to pay a “fair share” of public revenues. After Warren Buffett commented that he pays a lower average tax rate than his secretary, president Barack Obama proposed in 2011 to implement the Buffett Rule in the tax code. This rule was proposed in the Senate as the “Paying a Fair Share Act of 2012" in April, but was blocked by a filibuster that required a passage by 60 votes. The Buffet Rule would reduce the federal deficit by less than one percent, especially since wealthy taxpayers would respond by seeking out tax-free income such as interest on municipal bonds, and other ways to avoid the tax by bringing their taxable income to below $1 million. The alternative minimum tax (AMT) was supposed to tax the wealthy by eliminating tax loopholes, but that has failed, since Buffett and other rich taxpayers still pay a lower tax rate on dividends and capital gains. The Buffett Misrule will be no more successful at “fair share” taxing the rich than is the AMT. The Buffett Rule is an absurd measure that overturns long-established principles of U.S. income taxation. The federal and state income taxes are graduated, so that higher income brackets have a higher tax rate. Thus the tax rate on extra income, the marginal tax rate, rises with higher income, and so the marginal tax rate is higher than the average tax rate (total taxes divided by total income). The Buffett Rule does not affect marginal tax rates, but rather average tax rates. If a person receives $999,999 in income and pays an average tax rate of 20 percent, then if he receives $1 more, he would pay an extra $100,000 in taxes. If he receives $500,000 of income, his tax would be $100,000, and then for $1 million in income, it would be $300,000. thus an extra $500,000 of income would impose an extra $200,000 in tax, for a marginal tax rate of 40 percent. Thus going from $500,000 to $1 million in income would reduce the marginal tax rate from 40 to 30 percent. The Buffet Rule destroys the concept of a progressive tax system that levies higher marginal tax rates on higher income. Also, if the Buffett Rule is applied to all income, then interest on municipal bonds would become taxable at incomes over $1 million, and rich taxpayers would switch to corporate bonds that pay higher interest. This would force cities that are already broke to pay much higher interest on their bonds. The Buffet Misrule does not confront the biggest redistribution of all, the transfer of wealth from the poor and middle class to the rich from real estate. Government spending for public goods and welfare pump up land rents and values, so the rich, who tend to own much of the land value, get their taxes back implicitly in the form of higher land values and rentals. The Buffett Rule would not touch the subsidies to landowners in the form of fictional depreciation deductions, tax-free property sales, and deductions from taxable income from property taxes and mortgage interest. Most redistributionists seek the appearance of fairness rather than the substance. Superficially, fairness seems equivalent to equal shares, so it seems fair for the rich to have an average tax rate higher than that of those with lower income. But those who advocate superficial “fairness” in taxation have never explained why taxing any earned income is fair in the first place. What is truly fair is to respect the self-ownership of a worker and not tax his wage, no matter how high the earned income. What is truly fair is to also equally benefit from natural resources and from values created by communities. That benefit is measured by the amount of land rent that people are willing to pay to occupy an location. A truly fair tax share is the paying back to the people the land rent the title holder receives from the community population, commerce, and public goods, and to have all persons benefit equally from the gifts of nature. It is both fair and efficient to use the rent surplus from the economy for public revenue, and avoid the tax punishment of labor and enterprise. The fact that the ridiculous Buffet Rule is being seriously considered demonstrates the ideological blindness of the superficial redistributionists and their failure to learn a bit of economics and to apply simple analysis to their proposals. The Buffet Rule is more of a reflex like sneezing than a policy choice based on reason. Has America become a nation of non-thinkers?


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