Monday, April 16, 2012

Week of 04/16/2012

“Buffett Rule”: Good In Principle, Bad In Practice
– by David Matthews 2

When I was in school, students used to get around doing their reading assignments by hitting up the abridged versions those textbooks called “Cliff’s Notes”. Pick a story, any story, and there would be a Cliff’s Notes version in bookstores for you to go through and get the essential portions.

And this worked in a lot of courses. Students didn’t need to spend three hours reading whole chapters when they could get the “essential” parts, the parts that pretty much every teacher wanted you to know and would probably ask in the final exam.

Then one of my teachers decided to have a pop quiz… and asked for specific quotes from parts of the book that were not covered in the Cliff’s Notes version. Guess who suddenly got “D’s” and “F’s” for the first time?

With that in mind, let’s talk taxes.

When it comes to taxes, there are two truths that we cannot avoid.

The first is that our tax system is intentionally complex and complicated. There are a lot of hands involved with this, and plenty of parties that benefit from the system being as messed up as it currently is. Politicians and lobbyists are just the tip of the proverbial iceberg of beneficiaries in this matter. The true list of people involved with this first truth will probably blow your mind.

The second truth is that this flawed system is reinforced by an ongoing hypocrisy that says that each of us firmly believe that we pay “too much” in taxes but, at the same time, we also firmly believe that there is always some other group that is not paying “enough”. We cannot make any kind of changes to the tax system to free it of that first truth without running head-first into the second truth. Every attempt to fix the tax system, no matter how well-meaning, to make it more “fair” ends up failing because someone always complains that they are being taxed “too much” and that some other group is not getting taxed “enough”.

Because of these two truths, every attempt at changing the tax system, be it purely cosmetic or an actual change, ends up being shot down by a rash of demagoguery and class warfare. If you need to know why, I refer you back to the first truth.

So we have the latest attempt at “fixing” the tax system which is dubbed by both President Barack Obama and the media as the “Buffett Rule”.

The funny thing is that the “Buffett Rule” is not really a policy. It’s a statement. It is an observation made by billionaire financier Warren Buffett, who noted that he pays less in taxes than his secretary does. Of course he’s not the only one who does that, and the list happens to include President Obama himself, but the difference between Warren and the rest of the one-percenters is that he thinks there’s something wrong with that observation. The rest of that super-elite crowd just thinks there’s something wrong with Buffett.

This observation has led to the new “tax plan” of President Obama and the Democrats, which essentially says that anyone making a million dollars a year or more in income should pay no less than thirty percent in federal taxes. This would supposedly be accomplished by eliminating a lot of the tax breaks and loopholes and exemptions and exceptions that currently allow those at the top of the top of the economic pyramid to keep far more of their money than the people below them.

I’m sure some of you are thinking about this and wondering how this could be in the first place. After all, isn’t the tax rate for anyone making over $388,000 a year at 35%? And even if you could get around that, isn’t there something called the Alternative Minimum Tax Rate? Why yes there is. And it is because of this AMT that some of the tippy-top richy-rich have been able to pay 26-28% while their secretaries pay 35%. And that’s not counting all of those tax breaks and tax exemptions and tax deductions that they’ve managed to amass. Again, I refer you back to the first truth.

And now that the idea has been submitted, in comes the eternal whine from the conservatives and neo-conservatives; riding in on the second truth like Slim Pickens at the end of “Dr. Strangelove”. They’re quick to scream “class warfare” and complain endlessly about some mythical “47%” of people that supposedly don’t pay federal income taxes. Everyone likes to say they exist, but much like the Chupacabra, it’s next to impossible to actually bring one forward.

I actually talked with a tax preparer who said that such people do exist, but in order for them to avoid paying federal income taxes, they essentially have to be brood mares and pop out enough kids to qualify for enough deductions for their tax rate to equal zero. Come to think of it, I seem to recall that those are the very people that the conservatives and neo-conservatives complain about in the first place. Maybe this is the real reason why. After all, only the religious groups and the super-rich are supposed to be allowed to skip out on taxes.

But let’s get back to the so-called “Buffett Rule”, because spending too much time on the distraction is merely playing right into the second truth.

In terms of an observational standpoint, Mister Buffett is spot-on. Is it right to have millionaires and billionaires paying far less in taxes than their underlings? Hell no! Especially when you have a system in place that says that the more money you make, the more you should be paying in taxes. It is nothing short of an insult to that very system to be able to then invert the process at the very top.

Having said that, though, do I think that the so-called “Buffett Rule” as a tax policy is right? No, I don’t.

Let’s get brutally honest here… what President Obama is suggesting as the “Buffett Rule” is a bitter hypocrisy of the very observation that Buffett made. Even if the GOP-controlled House and the GOP-bullied Senate somehow managed to approve the “Buffett Rule” as a tax plan – and stranger things have happened in the past – you would still have that huge tax gap between the super-rich and their underlings.

Remember, the highest tax bracket is 35% for anyone making more than $388,000 a year. So you could still have a secretary to the super-rich making that much money and still get taxed that much, while their millionaire or billionaire employer only has to give up 30% in taxes. Then you’d have Mister Buffett back out here again complaining that his employees would still pay a higher tax rate than himself and his millionaire and billionaire friends.

In fact the media is already pointing out how Obama’s “solution” would still allow millionaires and billionaires to pay less taxes than their underlines. So at this point you have to seriously ask what the point of this whole “program” is if not for it to serve as a cheap Election Year gimmick.

Keep in mind that a lot of these exceptions and exemption and deductions were slipped into the tax system as part of someone’s earmark, or because of some congressional wheeling and dealing, or because of some so-called “economic solution”. They were put in because of the first truth, and they can be quickly and quietly reinserted later on, probably under different names.

The real solution to Buffett’s observation about who pays what in taxes does not rest with haggling over the various exceptions, exemptions, and deductions that are doled out as political favors. The real solution rests with replacing the current dysfunctional tax system with one that is so easy to understand that the lobbyists of K-Street and C-Street cannot game it, eliminating the first truth. A system that everyone pays, no matter how much money they have, thus destroying the second truth.

This kind of proposed system does exist. The only thing keeping it from being put in place is our own willful ignorance and political cowardice.

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