The Buffett Rule: The Hypocritical Issue
When the newly proposed AMT rate of 30% is signed into law, a crucial issue comes into play. An economic one, and one that many people do not understand, not do they grasp.
Legal vs. Economic Incidence
As Jeffery Brown, a Forbes.com contributor stated in his article, “Warren Buffett is not the Oracle of Public Finance,” Congress and Mr. Buffett fails to grasp a basic principle of tax analysis: the difference between the legal incidence and economic incidence.
So what is the difference between these to principles? Technically speaking, “the person who writes the check is not necessarily the same as the person that bears the economic burden of a tax.”
In the real world scenario of the difference, FICA is a major burden on the employee and not the employer. Under current FICA rules, employers must match the amount the employee pays. The employee actually misses out on approximately 7.5% on their paycheck because that is the employer’s matching FICA contribution. In other words, even though employers pay their share of the FICA tax, in the long-run the result is that workers are paid less than they would be paid in the absence of the tax. Thus, it is the workers and not the firms who are truly paying the tax, in spite of how it appears.
Another issue regarding the “Buffett Rule” is the question of income. To be more specific, what and how is income taxed? In Mr. Buffett’s case, his income is derived from investments. At the time of this writing, the capital gains tax rate (capital gains is profit from investments) is 15%. In fact, a majority of Mr. Buffett’s income is from capital gains and dividends. And dividends are treated with even more of a tax burden.
The Dividend Falsehood
It is not uncommon for wealthy individuals like Mr. Buffett to receive much of their income in the form of dividends and capital gains. This type of income may appear as if it is receiving “preferential” tax treatment, but the reality is that it is taxed heavily. This is driven by the fact that corporate income is taxed at the corporate level before it is available to be paid out as dividends (or used to repurchase shares, which can lead to capital gains for investors who retain their shares). The U.S. imposes a very high – 35% – marginal tax rate on corporate income. Thus, if a firm earns another $1000, it pays $350 in taxes, leaving only $650 to go to shareholders. If those shareholders are then taxed at a 15% rate, that is another $97.50 that goes to the government. This leaves only $552.50 in the pockets of shareholders for every $1000 of pre-tax earnings that are paid as dividends. Thus, the effective marginal tax rate on this income is more like 45% than it is 15%.
Economists debate on who bears the brunt of the tax burden in the above example. I believe the middle-class individual does because of the management fees on 401k and mutual funds. So, taking the dividend of $552.50 shareholders would receive, and subtract the average 3% management fee. Although the fee subtracts $16.58 on the dividend in the example, we are talking about a final net payout of $535.92 per $ 1000 of pre-tax earnings. Remember, we are talking about companies that have billions in said earnings. Although the management fee is not a tax, it is still money that you will not see.
My Big Issue with Buffett’s Issue
Finally, when Mr. Buffett stated that his tax rate is lower than his secretary, he is right in one aspect of the tax code. However, what really gets to the meat of the problem is: If he noticed this issue, is he working with his secretary to get her tax burden down to his level?
Since he is still pounding the issue into America’s face, I would say, “NO!” And this is the hypocritical issue I have. Bill Gates, Warren Buffett and many others are pledging to give away half their wealth. Bully for them, but what about teaching people to obtain the same levels of wealth that Gates and Buffett have built?
Conclusion
In the reality of our world, our current tax system does not punish the wealthy, but burdens the lower and middle classes. History has shown that nations that have punitive tax codes crumble and are destroyed. The Roman Empire, Ming Dynasty, Soviet Union*, British Empire, and soon the United States will join the history books as failed nations because they decided to use the tax code as a punishment, and not as a resource.
(* In general, the communist system as practiced by the Soviet Union is an extreme form of punishing the wealthy. However, only the members of the Politburo and their favored friends really had the wealth of the nation for their disposal and pleasure.)
- The Buffett Rule Won’t Apply to Warren Buffett (taxprof.typepad.com)
- Warren Buffett’s Taxes Probably Won’t Increase Under The “Buffett Rule” (outsidethebeltway.com)
- Democratic Senators to Push ‘Buffett Rule’ (nytimes.com)
- WSJ: The Buffett Tax Ruse (taxprof.typepad.com)
