April Fools? The Buffett Rule: Political Theatrics

For his Saturday address to the nation on March 31, the day before April Fools, Pres. Obama once again called of passage of the "Buffet Rule" guaranteeing a "minimum tax" of 30 percent on millionaires.

The problem with this? It's political theatrics and genuine foolishness if the administration hasn't considered what the Buffet Rule would actually do to the tax system. Believe it or not, if the Buffet Rule were to replace the Alternative Minimum Tax (AMT), the federal government could collect less revenue, not more! So, either this is a joke, foolishness, or blatant deception. Whichever of the three it is, the call for the Buffet Rule reveals how poorly Americans (and the media) understand our complicated and often stupid tax code.

Let us start by looking back a few months.

Buffett Rule's impact? W.H. won't say
By: Josh Boak
January 26, 2012 07:42 PM EST

From Politico:
http://www.politico.com/news/stories/0112/72056.html

President Barack Obama has left unanswered a major question about his Buffett Rule tax on millionaires: Just how much money would it raise? 

Administration officials are not releasing projected revenues from the much-hyped plan named after billionaire investor Warren Buffett. During the State of the Union address, Obama tied his proposal — which would tax those earning $1 million at a minimum of 30 percent — to cutting a deficit estimated to top $1.1 trillion for the fourth straight year. 

But for the moment, the White House wants to keep the attention focused on Obama's argument that it's unfair to tax Buffett's secretary at a higher rate than her boss.

How much money could the Buffet Rule raise, assuming nothing else changed?

One outside analysis by the non-partisan Tax Foundation indicates the rule would generate another $36.7 billion a year in revenue — far from enough to make a serious dent in a national debt of $15 trillion.

You would imagine $36.7 billion would be a lot of money, but it isn't. The national debt increases an average of $4 billion *per day* currently. That means that $36.7 billion is less than ten days of debt. So, the Buffet Rule would offset the debt increase for ten days out of 365 in a year. We'd still be adding $4.25 to $5 billion in debt per day after that in the 2013 budget.

If you want to really bring in serious money, you have to tax every American more, not merely the top one-half of one percent. (Technically, millionaires are in the top two-tenths of a percent. The "One Percent" starts at either $357,000 or $600,000, depending on how you calculate annual earnings versus taxable income.)

This need for extra money is why the AMT was passed in the 1960s, mainly to fund the rapid expansion of social programs while paying for a war in Vietnam. Sound familiar?

The Buffett Rule would not be the first time the government demanded the well-heeled pony up their fair share. Congress passed the Alternative Minimum Tax in 1969, after then Treasury Secretary Joseph Barr testified that 155 Americans earned more than $1.2 million in today's dollars and didn't owe the government a dime in income taxes. 

The AMT's pull weakened with each edit of the tax code. Some have jokingly called it the "Bethesda tax," since it now hits the upper middle class living places like the D.C. suburbs instead of those with extreme wealth. 

After the State of the Union, Linda M. Beale, a tax law professor at Wayne State University in Michigan, blogged about that the Buffett Rule sounded familiar. 

"Funny," she wrote, "that is what the original Alternative Minimum Tax (for individuals, and one for corporations) was supposed to achieve."

The real purpose of the Buffet Rule proposal, which is meaningless to the national budget from a statistical standpoint, is to appeal to popular anger against "the rich" — of course, this excludes the wealthy of the left, even though that is a majority of the wealthy.

Politico remind us:

In the State of the Union, Obama pitted the Buffett Rule against being forced to carve up government funding for education, medical research and the military, saying it was choice between tax cuts for the wealthiest Americans and "investments in everything else.

But, if you read my previous explanation and math closely, you realize that the Buffet Rule doesn't do anything meaningful to cut the debt, manage the annual deficit, or pay for new programs. It's less than two weeks' interest on our debt. The president is lying, to be blunt. He isn't merely getting the fact slightly wrong. He is intentionally deceiving voters.

Even worse, the Buffet Rule is almost certain to reduce federal revenues and not contribute one dime to debt reduction. Why? Because people in the million and billion range can do all sorts of things to move money around, shifting it from earned income to other forms of compensation. Trust me, a millionaire can afford tax attorneys and business consultants to reduce his or her tax liability. There is a reason Steve Jobs and some other executives accept "salaries" of $1 per year or even a salary under $150,000 but with all manner of special perquisites.

On average, someone hauling in $1 million a year might have fork over another $50,000 to Uncle Sam. That's a sizable tab for individuals but not a lot for the government, said David Logan, an economist at the Tax Foundation, a Washington, D.C. think tank. 

"It's an insignificant revenue gain," he said. "I view it more as a political tool than anything else, because it doesn't raise enough revenue to dent the deficit or the debt." 

And the prospect losing $50,000 to the government could cause the wealthiest Americans to burrow deeper into tax havens. 

"This will give huge incentives for people to hide their money or lower their incomes beneath the $1 million threshold," Logan warned.

But the administration has promised us the Buffet Rule would increase revenues, even though it would likely mean a repeal or revision of the AMT. That's simply untrue, no matter how you analyze the numbers. Repealing the AMT to pass the Buffet Rule? A fiscal mess would result.

The Wall Street Journal offered this perspective:

http://blogs.wsj.com/washwire/2012/03/16/study-buffett-rule-is-no-substitute-for-amt/ 

A new study by the nonpartisan Tax Policy Center highlights the impossibility of literally substituting a Buffett Rule for the AMT. 

The study shows that repealing the AMT would cost the government at least $1.2 trillion in tax revenues over the coming decade, while the current legislative version of the Buffett Rule would raise only about $114 billion. And that assumes that the Bush tax cuts expire at the end of 2012, something that few people think will actually happen. (Extending the Bush tax cuts makes the cost of AMT repeal much higher.) 

In a blog post, the Tax Policy Center points out that the AMT generates so much more revenue than the millionaire tax because it "simply hits a much bigger chunk of taxpayers…96% of AMT taxpayers have incomes under $1 million, accounting for 77% of all AMT revenue."

So, is the president the fool or is he playing the public for fools? Tough question without a good answer.

Sadly, I doubt our next president will be any more honest about our fiscal situation. Prepare for many more April Fools addresses from our elected leaders.