Saturday, April 14, 2012

Fair Share: How to Implement the Concept


Warren Buffett's Tax Rate is Lower than His Secretary's

Warren Buffett Crushes Republicans On Taxes


The Buffett Rule: A Basic Principle of Tax Fairness

The Buffett Rule is the basic principle that no household making over $1 million annually should pay a smaller share of their income in taxes than middle-class families pay.

The average tax rate paid by the very highest-income Americans has fallen to nearly the
lowest rate in over 50 years. The wealthiest 1-in-1,000 taxpayers pay barely a quarter of their income in Federal income and payroll taxes today—half of what they would have contributed in 1960. And, the top 400 richest Americans—all making over $110 million—paid only 18 percent of their income in income taxes in 2008.

Average tax rates for the highest income Americans have plummeted even as their incomes
have skyrocketed. Since 1979 the average after-tax income of the very wealthiest Americans –
the top 1 percent – has risen nearly four-fold. Over the same period, the middle sixty percent of Americans saw their incomes rise just 40 percent. The typical CEO who used to earn about 30 times more than his or her worker now earns 110 times more.

 Some of the richest Americans pay extraordinarily low tax rates—as they hire lawyers and
accountants to take particular advantage of loopholes and tax expenditures. The average tax
rate masks the fact that some high-income Americans pay near their statutory tax rate, while
others take advantage of tax expenditures and loopholes to pay extraordinarily low rates—and
it is these high-income taxpayers that the Buffett rule is meant to address .

 Of millionaires in 2009, a full 22,000 households making more than $1 million annually paid less than 15 percent of their income in income taxes — and 1,470 managed to
paid no federal income taxes on their million-plus-dollar incomes, according to IRS data.

 Of the 400 highest income Americans, one out of every three in this group of the most
financially fortunate Americans paid less than 15 percent of their income in income
taxes in 2008.

 Many high-income Americans are paying less in taxes than middle class Americans in taxes.
Nearly one-quarter of all millionaires (about 55,000 taxpayers) face a tax rate that is lower than more than millions of middle-income taxpayers. This is fundamentally unfair.

Beyond the 'Buffett rule'
Making taxes progressive is the right goal. But instead of shortcuts, the tax code should be overhauled.
April 14, 2012,0,4504843.story

Standing with millionaires and their assistants, President Obama makes a statement about the "Buffett Rule" in the Eisenhower Executive Office Building in Washington, D.C. (Chip Somodevilla / Getty Images / April 11, 2012)

The Senate will soon take up President Obama's proposed "Buffett rule," which would require people earning $2 million or more to pay at least 30% of their income in federal taxes. The inspiration for the rule was financier Warren Buffett's observation that because he makes his living from investments, he pays a lower tax rate than his secretary. The notion behind the bill is sound: A fair tax system should ask high-income households to pay a greater share of their earnings as taxpayers with smaller paychecks. But the measure addresses just the symptoms of the federal government's badly malfunctioning tax code, not the actual problems.

It may be a pointless exercise to delve into the pros and cons of the Buffett rule, given that the bill has no chance of making it past a Senate filibuster. Besides, as a tax measure originating in the Senate, it violates the constitutional requirement that all such bills start in the House — where the GOP majority has no plans to slap a new minimum tax rate on the wealthy. The fact that Senate Majority Leader Harry Reid (D-Nev.) took the bill (S 2230) straight to the Senate floor, with no hearings or committee action, is a good indication that the point is simply to grandstand.

Still, Democrats and the Obama administration have identified a real drawback to the current system. Although average working- and middle-class taxpayers theoretically pay a smaller percentage of their income in taxes than the wealthy, in practice, they often pay a larger share than many taxpayers with stratospheric incomes. That disparity is largely a result of tax limits, preferences and deductions that benefit the wealthy more than other taxpayers.

One is the cap that limits the Social Security tax to the first $110,100 in salary or wages earned this year (the cap rises in step with the national average wage). Everyone who makes $110,100 or more pays the same amount in tax — $6,826 — but that represents a bigger sacrifice from someone making $120,000 than someone making $1.2 million.

Another is the lower tax rate — 10% to 15% — applied to income from dividends and capital gains. That's a boon mainly to higher-income households, which invest more and derive a significantly higher percentage of their money from those sources.

A third is the deductions that lawmakers provide for activities they wanted to encourage, such as charitable donations, retirement savings, and mortgage interest payments. Although those deductions are available to everyone, upper-income taxpayers are the ones who benefit the most from them.

Such tax breaks undermine the progressivity that is a principle of federal income tax policy. That progressivity is supposed to be enforced by the higher rates levied on dollars earned above certain thresholds — for example, a married couple would pay a 10% tax on their first $17,400 in income, a 15% tax on the next $53,300, and so on.

The Senate bill rolls back the preferences, exemptions and deductions for roughly 0.1% of U.S. taxpayers. Those earning more than $2 million (and to a lesser extent, those earning between $1 million and $2 million) would have to calculate how much they owe in payroll and income taxes under the current system, and if it amounted to less than 30% of their gross income, pay a "fair share" tax to bring the total up to 30%.

The only exception would be for charitable contributions, but that exception highlights the trade-offs inherent in the Buffett rule that proponents all but ignore. Each of the tax breaks the Buffett rule would override was designed to provide an incentive for something Congress wanted to promote, or to restrict something lawmakers wanted to discourage. For example, the lower rate for investment income is designed to encourage saving and to make more money available for businesses to grow. The cap on wages subject to Social Security taxes limits the amount of monthly benefits that those with high incomes can collect when they retire. And the deduction for mortgage interest is designed to help families acquire large assets and promote more stable neighborhoods.

It's worth having a debate over whether these carve-outs are effective and whether they promote the economic growth that's in all Americans' interests. We have long argued that the proliferation of preferences, credits and the like has made the tax code not just unfair but also inefficient, maddeningly complex and counterproductive. Vast amounts of money are spent figuring out how to game the system. It's long past time for Congress to overhaul the tax code, clearing out the thicket of breaks in order to broaden the base, improve compliance and ensure progressivity.

Obama's budget proposals have urged Congress to reconsider many of the preferences in the tax code. The proposed Buffett rule, however, is a shortcut that skips the debate over the policy intricacies. Rather than simply bashing Republicans for defending tax breaks for millionaires, Democrats should be trying to reconcile the conflict between a fair, progressive tax code and one that provides incentives for all the things Congress wants to encourage.

Copyright © 2012, Los Angeles Times


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