Buffett Rule’s Perpetual Taxing Flaw
Thursday, July 05, 2012
Political independence is the ultimate expression of democracy. I do not have an ax to grind, and can see the good, the bad, and the ugly, regardless of zoological symbol or lack thereof. Some may even say that the subject is not in line with investments, but pointing out that the tax on dividends will triple if government does nothing before 2013, may change a few minds.
The once headline grabbing “Buffett Rule” has been unusually quiet, although a Bing search on the subject on July 5, 2012, yielded an ad sponsored by the White House.
But before we tackle the issue, let’s no forget that in May “Lawmakers work with Simpson-Bowles for tax deal” and the last time this commission provided an opinion, it was ignored. A taste of what is in the works has already become reality across the pond, and “France slaps 7 billion euros in taxes on rich and big firms.” The problem is that the wealthy cannot solve the debt issues on their own, and everyone will be hit in due time.
France's new Socialist government announced tax rises worth 7.2 billion euros on Wednesday, including heavy one-off levies on wealthy households and big corporations, to plug a revenue shortfall this year caused by flagging economic growth.
I can understand the “Buffett Rule” and actually feel that it could work and help the economy if it wasn’t flawed. But before I move on, a Gallup poll provides a window into how my fellow Americans view the proposal.
Obviously the more one earns, the less likely one is to display a willingness to give up his/her wealth. But I would expect the numbers to be more extreme, and was surprised to see that 32% of those earning $30,000 or less are against the idea of wealth redistribution.
Here’s the scenario in simple form: Assume that I earn $1 million and 100 individuals earn $30,000 annually, painting myself as the “1-percenter.” If I go from paying 20% to 30% in taxes, effectively giving up $100,000, I would expect my $100,000 to be distributed among the other 100 individuals, providing them with $1,000 each to spend and improve the economy. Then again, my lifestyle would not change whether my net income was $800,000 or $700,000. And that is what many people believe would happen!
The problem is that the government will keep the $100,000 and either pay its bills and keep on spending, or invest it in a bean farm only because someone thinks that it is the brightest idea of the day. And when my $100,000 does not suffice, the other 100 individuals will be told that the wealthy are already fairly taxed and it’s time for everyone to share the sacrifices. Why? Because my $100,000 will be used to hire the bean farm manager and then everyone else has to be taxed to buy beans before planting season. Ultimately the cycle repeats itself and the wealthy will not be contributing their fair share again after the taxes on the non-wealthy are increased.
This is not wealth redistribution, but trickle up taxation to feed a “Government Gone Wild,” and, economically speaking, we know how Europe has fared over the last 10 years with similar policies. Using German and Portuguese income tax rates as two economic extremes, one can see where we’re going. The top rate in Germany is 45% on income of 250,000 euros, and an income as low as 52,882 euros is hit with a 42% tax rate. Portugal’s top rate is 45.88%, and if one earns between 17,979 euros and 41,349 euros, the tax bite is 34.88%.
One can even state that Germany has done quite well, but the perceptions there will be proven to be fallacious, for the economic head winds will manifest themselves in due time, especially as the country still lacks domestic consumption, relies on exports, and needs to maintain the eurozone intact for its own good. In Portugal, and I know this first hand, 20% in taxes are deducted from the interest one earns on a bank account before the money hits the ledger – or the government being one step ahead of the taxpayer.
Having said all of the above, the issue of fairness is legitimate, although the topic’s subjectivity continues to provide plenty of fuel for politically flawed arguments, not economic solutions. In addition, what the fairness narrative is omitting, yet implying, is that apart from those earning $1 million or more, everyone else is already paying their fair share -- as of today, that is. Once again, the questions being asked are, more often than not, incorrect. It is not how much tax can be squeezed from every citizen, but rather how much money does government need to conduct its business and provide the services that its citizens expect, in an efficient manner. Only then can a fair tax be calculated, but that question has never been posed.
Common wisdom sometimes is not so common, and maybe, just maybe, those that earn $30,000 or less and oppose the “Buffett Rule” are already anticipating the end to the story before it’s written. Think Greece, and the eurozone for that matter: Politicians promised and gave all they could, until they couldn’t anymore.