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September 21, 2011

The So-Called "Buffett Rule" Wouldn't Even Touch Its Ostensible Target, Warren Buffett

Gee, it's almost like a friend of the administration had a hand in drafting the law proposal vague noodling with stick figures and imaginary numbers.

The very rich pay a smaller effective tax rate than some wage-earning poorer folks primarily for two reasons:

1, the bulk of their income is derived from capital gains.

2, much of their income is derived from tax-free state and municipal bonds.

Let's look at both of those. Capital gains are taxed at a lower rate for a couple of reasons, the most frequently-cited one being that capital investments lead very directly and efficiently to higher economic activity (more jobs, and ergo more tax revenue) and so we wish to encourage these.

The only way to prevent a Warren Buffett type from paying less in taxes on his capital gains is to jack up the capital gains tax rate (or impose an Alternate Minimum Tax on millionaires, which would have the exact same effect).

State and municipal bonds pay much lower rates of returns than other bonds. So why do people buy them? It's not that they're particularly safe -- many corporations have equivalent or better credit ratings, and in fact right now a great many municipalities, and a handful of states, may default.

They pay such low rates, and have eager buyers, because their rates of return, while low, are tax free, meaning the effective actual rate of return is higher. If you earn 3% from a municipal bond but it's tax free, that's the same as (I'm simplifying here; I don't do math) 6% from a corporate bond in which you're being taxed at 50%.

This is, of course, a boon to states and municipalities, who can borrow money and pay dirt-cheap rates of return for it.

Now, if Obama was serious about making sure "millionaires and billionaires" would pay at least, say, 30% in taxes on all income, he could impose some kind of millionaires ATM.

However, doing so would mean that municipal bonds were no longer attractive at such low rates (you'll wind up paying that Alternate Minimum Tax, defeating the whole purpose of holding low-rate but tax-free bonds in the first place) and the cost of investing in capital would go up as well.

What havoc this would play with the economy, who knows.

Fortunately, however, Obama is not, apparently, at all serious about a Buffett Rule. If he were, he might endeavor to make certain the so-named rule would actually hit Warren Buffett.

In fact, he's just calling a series of unrelated and non-Buffet-targeting tax hikes, previously proposed and previously rejected, a "Buffet Rule," and hoping you won't notice.

This is not an economic plan; it's an electioneering plan. This isn't about thousands of jobs, but instead only dozens: Barack Obama's and his staff's.

Thanks to spongeworthy.

Spelling Corrected... "Buffett," not "Buffet" as I kept writing.

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posted by Ace at 02:01 PM

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