Op-Ed: The Buffet Rule Is A Mistake

By Howard Kleinhendler: There’s a big push in the Democratic collective mind, i.e., the Obama re-election campaign, to tax individuals with earnings over $1 million a year with a minimum 30% tax. Known as the “Buffet Rule,” after billionaire Warren Buffet, the theory goes that wealthy investors whose marginal tax rate is largely based on the 15% capital gains rate should pay more to help offset the costs of government programs such as Social Security and Medicare. While popular with the masses who view the uber wealthy with disdain, this is actually a bad idea that will drive away critical long-term investment and further erode our capital markets. Last week, the Senate rejected the legislation. It should remain buried.

The power to tax is one of the government’s inherent rights. Even the most fanatic Tea-Party zealot will agree that we need to levy taxes to pay for our national defense and critical government functions. To this end, administrations, both Republican and Democrat, have employed various parts of the tax code to effectuate both economic and social policy. We grant tax credit for raising children and caring for the elderly to encourage those activities. Our tax policy incentivizes farmers to grow crops for ethanol and companies to develop clean energy like solar and wind power. And, we encourage people to hold their investments for at least a year by taxing their gains at a reduced capital gains rate.

The problem with the Buffet Rule is that it removes financial incentives from long term investors, many of whom earn more than $1 million a year. This will merely drive the equity markets increasingly towards short-term speculators who already cause havoc. They are largely responsible for wild price swings that have little to do with business fundamentals. This erodes market confidence and chills investment. By contrast, the capital gains tax promotes long term investment which adds stability to the markets. Effectively eliminating it for people who earn over $1 million is a mistake.

There are better ways to generate revenue. Itemized deductions for home mortgage and state and local taxes can be reduced as income exceeds $1 million. Loopholes that exempt corporations from taxes on income earned overseas could be eliminated thereby capturing billions in tax dollars while also removing incentives to send American jobs to China and India. Estate taxes of 35% on estates larger than $10 million will generate billions in revenue from the very wealthy without dampening investment. A rethinking of our imbalanced foreign trade policy through increased tariffs on foreign imports will generate substantial revenue while evening the playing field for American manufacturers. In short, there is no need trample on the capital gains tax.

Of course there are those who argue for reducing taxes on the wealthy at the expense of cutting Social Security and Medicare. This approach, based on trickle-down economics, has proven to be a catastrophic failure over the past 20 years. Those who espouse it are either those who stand to benefit, i.e., the very wealthy, or those who are simply too unsophisticated to realize the fallacy in the theory. In the end, only the Government can provide for the poor and the sick. Corporate America cannot. The Board of Directors of Apple and GE and Coca-Cola are bound by fiduciary duty to maximize profits for their shareholders, not to finance public hospitals and food stamp programs. Any person who supports the notion that social needs can be financed by the private sector is delusional. It has never been done anywhere in the world. And it never will.

So the choice is clear. We either find a way to raise more revenue or we drastically cut critical social programs. The latter course, promoted by so-called fiscal conservatives, is short-sighted and doomed to failure. For in the end, the taxpayers will have to foot the bill for treating the elderly with acute health problems and feeding the poor. There are ways to raise the needed funds without eroding the capital gains tax. The Buffet Rule is political propaganda, not intelligent tax policy. It should be forgotten.

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  1. Let’s be realistic. We all know that, in theory, our expenditures cannot exceed our revenue without a deficit. But everyone says that the other guy should have his taxes increased or his social services cut. This is a version of NIMBY. The ones in control who have the ability to enact the legislation that would affect these services and revenues are the powerful and the wealthy, both of whom are more than happy to balance the budget on the backs of the poor and the middle class. Any new legislation that is enacted will adversely affect someone, and that someone is NOT going to be the one who is in power. There is no solution to the problem that will please everybody. All will agree that in the last ten years, the burden of “balancing” the budget has fallen on the middle class. I don’t see how that has changed anything. There are plenty of reasons why trying to raise revenue by taxing the super-wealthy is not a good idea; there are plenty of reasons why it IS a good idea. Since taxing the middle class hasn’t worked, maybe it is time to transfer the burden to raising revenue to the wealthy. If nothing else, it’ll relieve the burden from the middle class. But, realistically, that will not happen because the ones who vote of this are the super-wealthy controlled by the super-wealthy. So things will continue the way they are because only the super-wealthy have any control over what is passed and what is not.

  2. Quote “Since taxing the middle class hasn’t worked”
    its NOT about taxing the middle class, its about out of control spending !!!!!!!!!!!!!!!!!!!!!

  3. Hi Howard
    Having some capital gains tax ability myself I am all for paying less taxes. However I have been listening to the argument that capital gains tax staying low is important and I’m just not buying it.
    Even in your argument like most that I have heard it is based on general speculation of what causes an investor to want to invest. No hard numbers given. Simple numbers and math don’t lie I was taught and they tell me that anyone making over 150k will be paying about 35 percent taxes but a guy who worked hard and made lot of money 10years ago and now just has investments that pay him a million dollars a year gets to pay only 15% a year. Why is that fair. Yes if he pays only 15 percents he is happier to invest and keep 850k of his yearly return of a million but guess what if he has to pay 35% and only keep 650k he will do it because its still a lot of money to be made. Also why should he be better then someone who opens his own grocery store business and invested a half million and then pays full income tax on every penny above that investment.
    A flat tax seems to make the most sense to me. I agree that the starting point of 1 million is unfair. Exceptions for those making less then a living wage is fair and understandable as long as good systems are put into place to prove they really are trying to improve their income. Also you mention raising estate taxes. Why? The estate taxes are double taxation from the start and seem very unfair and have created its own industry of how to avoid them. I do agree that loopholes should be cut out for corporations.
    The idea of leaving capital gains the way it is just looks like another weak argument that republicans will loose on in November. Republicans need to make a more convincing sale here if you want the boys to keep their 15% capital gains.

  4. you can’t keep exempting rateables from taxes and having a town that keeps growing and not have a deficete. we have 120 + private schools getting a free trash pick up yet our public schools pays for trash services to an outside co., same with eroding the industrial park with tax exempt property. giving slum landlords free reign when they should be paying for multiple services to their properties – they should be held accountable as there is a price to doing business. Stop making money on the backs of the taxpaying residents.

  5. A very ‘simple’ tax would be to not give people who earn more that 500k per year their social security checks. they really dont need it and will save the gov a bundle.

  6. Why is it NOW everyone talks about “Out of control spending”? Where was that catch phrase when we were spending BILLIONS per month invading Iraq based on long proven fake WMD information? As always, we don’t complain about military spending, but do when it comes to feeding the poor and elderly? Healthcare for all citizens? No! That’s out of control! If we never invaded either Iraq or Afghanistan (Neither of which country HAD Osama Bin Laden in them BTW), we would have had oh about 7-8 TRILLION dollars still. We could have had universal healthcare, an advanced energy technology which would have removed ANY need for foreign oil ever again. We would have had billions left for defense, aid to our allies and could have concentrated on the real threats of Iran and North Korean nuke programs. You know, the ones that actually DO have WMD’s? When did we become so hateful towards our own people in need that we call these programs “out of control”. Mismanaged? Oh you bet! Do we need to fix the corruption? Oh you bet! But just pull the funding? Close the departments? Why punish people in need because greedy politicians and crooks abused the system? (Yes that also means Democrats who abuse their political base for crony appointments and cash grabs) Aren’t we as good humans supposed to help our fellow man? You can’t just pull the rug from the needy and scream “Get a job” like Herman Cain said to. How is a 75 yr old “getting a job” or a 6 yr old, or a wheelchair bound disabled person with cerebral palsy? I never in my life seen things as bad as they are now where everyone has forgotten their humanity in favor of partisan political hatred. Truly sad.

  7. Quote “A very ‘simple’ tax would be to not give people who earn more that 500k per year their social security checks. they really dont need it and will save the gov a bundle.”
    then don’t make them pay into it ,besides thats not even equal to one grain of sand compared to all the sand on all the beaches in the world

  8. To #4 you wrote “Also why should he be better then someone who opens his own grocery store business and invested a half million and then pays full income tax on every penny above that investment.”
    The reason why this makes no sense is because if and when he sells his grocery store and he makes a profit on the sale thats considered a gain in Capital and as long as he had that business for more than a year he will only pay 15%(long term capital gains). on the other hand the income from the business is taxed like regular income, just as the dividends someone will get from a company he owns shares in.

  9. to smalltown says:
    Well said there are many facets to the causes of the problems in Lakewood and even though there are those that would bury their heads in the sand and pretend that none are contributing to the demise in the end who will support this town once all the revenue generating is gone do to way this town opperates THEN WHAT??

  10. My point is the whole idea of capital gains requiring lower taxes then other income makes no sense. Why should someone only pay 15% when he sells his store and makes a profit but pay 35 percent taxes on the profit from selling a broom out of that store. Everyone should always pay the same tax rate as long as he made a new profit. I have heard statistics that if capital gains paid normal tax rates then we could reduce everyone else’s taxes down to 20% and still more money would be collected than todays system. There would be plenty more money to invest and stimulate the economy. The capital gains lower tax rate is clearly a loophole for the rich. Give it up and we will all pay lower taxes.

  11. Quote “The capital gains lower tax rate is clearly a loophole for the rich. ”
    no its not , are you saying only the rich invest ??and what do you exactly call rich ? I do agree that everyone should pay something ,do you reallize however that a minority of the people pay a majority of the tax revenue in this country (they are not the middle class either )

  12. The golden rule is: The man with the gold rules. The wealthy make uber contributions to buy our politicians. Their tax rates are protected by those politicians. The wealthy would not lose one step in lifestyle, investment or otherwise if they paid the tax rate prior to the Bush breaks. Rescind the Bush tax breaks. Cutting our income while entering two wars, incurring expenses for Katrina, 9/11 and other disasters was insane. It only put us in a deeper hole. Sure cut expenses where possible, but increase revenue if you’re serious about deficit reduction.

  13. I like the idea of a flat tax. There should be a 15 or 18% flat tax on everything that you buy and no more proerty taxes or income taxes. Anything you buy is taxed and that is it. This was everyone pays the exact same taxes if you want something.

  14. What many people who espouse the ‘Buffet Rule’ forget, is much of the income wealthy people derive tax free is from Municipal Bonds, which no union-loving democrat will give up the break, as well as charitable deductions, which would be political suicide to remove.

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