In his State of the Union address last week, President Obama used billionaire investor Warren Buffett's secretary, Debbie Bosanek, as a prop to illustrate the unfairness of our tax system. "Right now," he said as Bosanek sat near first lady Michelle Obama, "Warren Buffett pays a lower tax rate than his secretary."
Commentators spent the next week speculating about what Obama meant. Was he referring to marginal rates or effective rates? On taxable income or adjusted gross income? Was he talking about federal income taxes or payroll taxes as well? If the latter, was he counting the so-called employer's share or just the employee's share? What about state income taxes?
As is often the case with taxes, things got complicated pretty quickly. Much of that complexity is unnecessary, and it helps explains why taxpayers dread this time of year, when they start pulling together the evidence they need to make their case to the IRS: Take my money, please, but don't peruse, penalize, or prosecute me. The headache-inducing complexity of the tax code is also a major reason for the unfairness Obama decries. Yet the policies he recommends would only make the problem worse.
There seem to be two main factors that explain why Bosanek pays a larger share of her income in taxes than Buffett does. First, she earns a salary, while her boss's income consists mostly of dividends and capital gains, which are taxed at a lower rate. Second, payroll taxes are assessed on just the first $100,000 or so of income.
One possible response is to raise the tax rate for dividends and capital gains so it is the same as the rate for wages. But there's a strong argument for reducing the rate, currently 15 percent, even further"”all the way to zero, since these earnings either already have been or will be taxed as corporate income. Indeed, Harvard economist N. Gregory Mankiw argues that Buffett underestimates his tax rate because he does not take into account the corporate taxes he pays indirectly as a shareholder.
As for payroll taxes, Buffett is right when he says they are highly regressive. But instead of raising the "wage base," why not abolish the taxes? Congress spent Social Security's surplus on other things for many years, and now it has to put money back into the program because annual payroll tax revenue no longer covers benefits. Pretending these are separate piles of cash serves only to obscure our tax burden and the federal government's fiscal condition.
Obama's idea of "tax reform," by contrast, is the "Buffett Rule," which says "if you make more than $1 million a year, you should not pay less than 30 percent in taxes." This is just a new wrinkle on the alternative minimum tax (AMT), which the national taxpayer advocate calls "the poster child for tax-law complexity," the "most serious problem facing taxpayers." The AMT, itself grotesquely complicated, was a response to the complexity that allows rich people to avoid taxes. It has morphed into a covert mechanism to spring tax hikes on people who are decidedly not rich.
The AMT encapsulates the problems with a system so byzantine that even Mitt Romney, a wealthy, financially sophisticated guy with plenty of expert help, can't figure out how much he owes. New York Times financial columnist Floyd Norris reports that the Republican presidential candidate overpaid by about $44,000 last year because of a capital gains miscalculation.
Yet in the same speech where Obama condemned the "loopholes and shelters" that rich people use to avoid paying their "fair share," he promoted policies that compound the complexity, including special breaks for college students, "companies that hire vets," "small businesses," "high-tech" manufacturers, "clean energy," energy-conserving building improvements, and "companies that choose to stay here and hire here in America." This insistence on using taxes for economic meddling and social engineering has made the system the hideous mess it is today.
Jacob Sullum is a senior editor at Reason and a nationally syndicated columnist. Follow him on Twitter.
© Copyright 2012 by Creators Syndicate Inc.
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Politicians cannot simplify the tax code. It stands as the go-to platform for purchasing votes and donations.
"Elect me and I will give you add a page or two to the United States Tax Code on your behalf."
It's also one of the go-to threats when dealing with businesses or industries.
"Nice little tax breaks you got here; be a damn shame if something happened to them!"
The complexity also means that anyone can be in violation of the tax code at any time thereby ensuring those with something to lose will attempt to curry favor with the right politicians.
"That's a nice business you've got here. Wouldn't want to see it audited now would we?"
@ Fist, Salt, Bee, & sarcasmic: Well said. The thing (well, *one* thing) that drives me up the wall is the perennial lip service given by all "concerned" to "fixing" the tax code.
As used by a politician, the term "fix" shares pretty much the same meaning when uttered by bookies, gamblers, and mobsters!
It's true. Who knew you were supposed to pay taxes on all that shit.
"Elect me and I will give you add a page or two to the United States Tax Code on your behalf."
That's Democracy.
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Are they that stupid, or do they think we are really stupid? Buffet's company pay corporate taxes - the highest in the world. The IRS is currently suing them for over a $Billion in back taxes.
Then Buffet pays himself a relatively small salary which is taxed again. This doddering old fool and his frumpy secretary are trying to sell us this load of crap without any actual numbers.
He may be a lot of things, but he's no fool. Buffett knows exactly what he's doing, and it has nothing to do with making the tax system more "fair."
Are you sure? He seems like an idiot savant - one of the greatest stock pickers ever, but unable to do basic shit like drive a car.
My best friend in college never drove. He was eccentric, but no idiot. It certainly wasn't from lack of coordination or concentration.
Buffet is no idiot, but he certainly is a fool.
Do you get the Reason mag? They have a good article on Buffett in this month's edition. Buffett is not an idiot. He stands to make a lot of money from the policies he's pushing from life insurance and estate auctions.
Don't forget - it always pays to fellate the ruling class.
Or is he the puppet master and Unicorn Barry is the puppet?
Buffet's comments previously about higher taxes were self-serving when he was talking about the estate tax. They're doubly so now that he's talking about increasing capital gains taxes. What a piece of shit he is.
Are they that stupid, or do they think we are really stupid?
Yes?
"Are they that stupid, or do they think we are really stupid?" Yes, and in most cases they are right!
One possible response is to raise the tax rate for dividends and capital gains so it is the same as the rate for wages.
another is to lower income tax rates to 15% to solve this urgent unfairness.
But I'm guessing Buffett's secretary pays the same capital gains rate Buffett does.
Value and length of time held determine the rate.
But so does your marginal income tax rate. There is actually a 0% tax rate on divs and cap gains if your regular income tax rate is low enough.
I would love for a liberal to explain to me how dividends paid on a stock that's lost half its value is "income" in any meaningful sense. Take GE as one example. If you bought it in mid 2008 you probably paid about $33/share. Since then, based on today's prices, you've lost about 40% of your money. Yet Obama wants to tax this losing investment as if it is adding to your wealth.
The risk of stock ownership plus the fact that the income is already taxed twice makes dividends completely different from ordinary income and fully justifies it being treated completely differently.
That's the funny thing. I was talking taxes with some of my friends yesterday, they were asking a bout reporting interest, it was a negligible amount on their bank account, so I told them that if I were them to not report it because the goverment has no right, in principal, to interest on money that has been taxed, especially when they do not take into account the loss of real value due to inflation. That part floored them when I explained it in depth. That you could have seen a nominal gain but still have your real value of your assets may be less than what you paid for in real terms because of inflation, but the goverment would still tax you on the nominal gain like you actually made any money.
yawn
Sales tax: If a company buys goods, they'll pay a sales tax; they then produce new goods which are sold, and the customer pays another sales tax.
Estate tax: If a person leaves property to his son, the son will pay an estate tax; if the son leaves that same property to his son, he will pay another estate tax.
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