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OBAMA'S BUFFETT RULE -- BY HENRY W. BURKE -- 4.16.12

Obama's Buffett Rule

 

by Henry W. Burke

 

4.16.12

 

 

 

EXECUTIVE SUMMARY

 

Under the Buffett Rule, businesses and families earning $1 million or more will pay a minimum 30 % effective tax rate.

 

The Buffett Rule would raise a paltry $47 billion over 10 years ($4.7 billion per year). 

Think about it -- $4.7 billion per year out of a $3.6 trillion annual budget is a miniscule 0.13 %! 

Clearly, the Buffett Rule is not about raising revenue; it is about Obama pushing class warfare in a feeble attempt to win re-election. 

The Buffett Rule would be counterproductive from a revenue standpoint.  Obama is pursuing a gimmicky and farcical approach.

Raising taxes during a recession has never been viewed as a sensible policy.  The economy is stuck in neutral, and we need to put it in gear.  A tax increase at this time would have a very chilling effect on the economy. 

Obama seems intent on pushing class warfare.  Clearly, this will be a major theme in his re-election campaign. 

Top earners are already paying more than their "fair share" of taxes.

 

The top 1 % of income earners paid 38 % of all federal income taxes in 2008; and the top 10 % of earners paid 70 % of the total taxes.

 

 Taxpayers who had incomes over $200,000 earned 32 % of the total income and paid 52 % of the total income taxes.

 

The Total Individual Income Tax for 2008 was $1.032 trillion; the Average Tax Rate for taxable returns was 13.6 %.

 

About 50 % of Americans pay no tax at all!

 

The percentage of people who do not pay federal income taxes, and who are not claimed as dependents by someone who does pay them, jumped from 14.8 percent in 1984 to 49.5 percent in 2009.

 

That means 151.7 million Americans paid nothing in 2009. By comparison, 34.8 million tax filers paid no taxes in 1984.

 

 

 

INTRODUCTION

 

Barack Obama, "The Campaigner-in-Chief," is flying around the country on Air Force One to promote his famous "Buffett Rule."  He has given at least 21 speeches recently in which he discussed the rule. 

 

By doing so, he is trying to distract us from the real problems facing our country.  A few of these problems include: Obamacare, the failed Stimulus, soaring deficits and national debt, high unemployment, weak economy, high gasoline prices, Keystone XL Pipeline, Solyndra, and so forth.

 

Obama knows he cannot run for re-election based on his record.  Accordingly, he is attempting to divert the voters' attention away from the economy by igniting class warfare.  Obviously, Obama does not use the term "class warfare," but he disguises it in terms like "fairness" and "fair share."

 

In any discussion on taxes, it is essential to have the facts.  Based on an IRS report, I will provide the facts on who pays the taxesThe highest-earning families and businesses already pay the lion’s share of the federal income tax burden. 

 

The following topics are included in this discussion:

 

          A.  The Buffett Rule

          B.  Obama's Class Warfare Theme

          C.  Who Pays the Taxes?

 

 

 

A.  The Buffett Rule

 

1.  Background

 

The "Buffett Rule" started when Omaha investor Warren Buffett wrote an op-ed piece in the New York Times in 2011 where he claimed that he paid a lower tax rate than his secretary.  You might recall that his secretary (Debbie Bosanek) was prominently seated next to Michelle Obama during the last State of the Union message. 

 

Buffett is a Democrat and an Obama supporter who likes to say that rich people should be paying more in taxes.  Warren Buffett (Berkshire Hathaway) is ranked No. 2 behind Bill Gates (Microsoft) on the "Forbes 400 -- The Richest People in America."

 

In a 4.11.12 speech, Barack Obama stated:

          We can settle for an economy where a shrinking number of people do very, very well and everybody else is struggling to get by, or we can build an economy where we’re rewarding hard work and responsibility -- an economy where everybody has a fair shot, and everybody is doing their fair share, and everybody is playing by the same set of rules.

Obama continued:

 

          Now, next  week, members of Congress are going to have a chance to vote on what  we call the Buffett Rule.  And it’s simple:  If you make more money -- more than $1 million a year, not if you have $1 million, but if you make more than $1 million a year, you should pay at least the same percentage of your income in taxes as middle-class families do. 

 

Obama even tried to capitalize on the goodwill that Americans have for Ronald Reagan by saying:  

          And if it will help convince folks in Congress to make the right choice, we could call it the Reagan Rule instead of the Buffett Rule.

 

http://www.whitehouse.gov/the-press-office/2012/04/11/remarks-president-buffett-rule

 

 

2.  Details

 

Under the Buffett Rule, businesses and families earning $1 million or more will pay a minimum 30 % effective tax rate.  The new tax (Buffett Tax) would apply to taxpayers with Adjusted Gross Income (AGI) in excess of $1 million ($500,000 for married individuals filing a separate return).  The taxpayers' tentative "fair share tax" equals 30 % of the taxpayer's AGI less modified charitable contributions.  The Buffett Rule is really a capital gains tax hike in disguise.  The adjectives that best describe the rule are "gimmicky" and "farcical."

 

Democrats have given the Buffett Rule a catchy name -- "Paying a Fair Share Act of 2012" (Senate Bill S. 2059).  Of course, this is consistent with Obama's re-election strategy.  The Senate is expected to vote on the bill very soon. 

 

http://www.gpo.gov/fdsys/pkg/BILLS-112s2059is/pdf/BILLS-112s2059is.pdf

 

 

[I predict that Obama's Buffett Rule will be solidly rejected by Congress (House and Senate).] 

 

The plan would drastically raise taxes on successful Americans and small businesses. The core of Obama's argument is that the rich are not paying their fair share.

 

For all of its fanfare, the Buffett Rule would raise a paltry $47 billion over 10 years, according to a 3.20.12 memorandum by the Joint Committee on Taxation.  Think about it -- $4.7 billion per year out of a $3.6 trillion annual budget is a miniscule 0.13 %! 

 

 

A more realistic analysis of the Buffett Rule finds that it will have a negative effect on tax revenues.  This is the expected result; tax increases actually produce lower tax revenues.

 

Clearly, the Buffett Rule is not about raising revenue; it is about Obama pushing class warfare in a feeble attempt to win re-election.  His re-election trumps all other considerations.  When Americans are asked in a poll if the rich should pay more taxes, the answer is predictable.  Obama loves class warfare / income redistribution ideas.  The Buffett Tax makes no sense from a revenue standpoint, but he thinks it will garner him votes.  

 

 

3.  Warren Buffett's Taxes

 

Of course, Warren Buffett and Barack Obama are distorting the facts when they say that Buffett is paying a lower tax rate than his secretary.  Warren has not released his tax returns or his secretary's tax returns but some people have tried to estimate the figures (guesswork).

 

The New York Times published Warren Buffett's op-ed piece on 8.14.11 entitled, "Stop Coddling the Super-Rich."  In this article, Mr. Buffett wrote:

 

          Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744.  That sounds like a lot of money.  But  what I paid was only 17.4 percent of my taxable incomeand that’s actually a lower percentage than was paid by any of the other 20 people in our office.  Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=1

 

How can Obama get away with saying that Warren Buffett pays lower tax rates than his secretary?  I am going to make some educated guesses based upon public information sources

 

From the Berkshire Hathaway 2012 Proxy Statement, we know that Buffett draws a consistent annual salary of $100,000, which is extremely low for a CEO of a major company.  This figure does not count other compensation for such items as security services and director's fees.  With those items included, Buffett's total compensation for 2010 was $524,946.  Some people have guessed his secretary's salary at around $400,000.

 

We know that Mr. Buffett does not live on $525,000 per year and that he derives most of his income from capital gains.  (Berkshire Hathaway does not pay a dividend to stockholders.)  He stated in the NYT op-ed piece that he paid total federal taxes of $6,938,744.  

 

Whenever Buffett needs money, he simply sells some stock.  On his tax returns, he would show the capital gain on the shares of stock sold that year.  Berkshire Hathaway stock has done amazingly well over a 46-year period, and most of Buffett's shares were acquired many years ago.  Any sale of Berkshire stock would produce a sizeable capital gain. 

 

 

4.  Buffett's and His Secretary's Tax Rates

 

His $525,000 salary places him in the 35 % marginal tax bracket.  Long-term capital gains (investments held longer than one year) are taxed at 15 %.  Mr. Buffett stated that his combined tax rate was 17.4 %, about what you would expect for his situation.  If his secretary earns around $400,000, she would be in the 33 % or 35 % tax bracket, depending on her deductions. 

 

This is how Buffett can make the statement that he pays a lower tax rate (not lower taxes) than his secretary.  However, this is very superficial and quite misleading.

 

We know that Warren Buffett gives away billions of dollars each year to private foundations (primarily the Bill & Melinda Gates Foundation).  This charitable giving will further reduce his effective tax rate.  Of course, he can only deduct 30 % of his Adjusted Gross Income (AGI) in a given year because the gift is made with appreciated securities (stock).  If he gave cash, he could deduct 50 % of his AGI in a given year.

 

Numerous people have said the obvious.  If Warren Buffett and his rich friends think they are not paying enough in taxes, they can always write a check to the U.S. Treasury.  There is nothing to prevent them from paying more to the government.

 

[Mr. Buffett, this is the Treasury website for your gift.]

http://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm.

 

5.  The Alternative Minimum Tax (AMT)

 

There are other factors involved.  Curtis Dubay of The Heritage Foundation wrote an excellent article, "The Buffett Rule: Fair to No One."  Dubay observed that the Buffett Rule is the AMT in disguise:

          In fact, the Buffett Rule is just a new twist on an already-existing policy to ensure that the wealthy pay their “fair share.” Congress passed the Alternative Minimum Tax (AMT) in the early 1970s to ensure that a few high-income taxpayers did not reduce their tax liability too much by taking advantage of all the deductions, exemptions, and credits Congress put in the tax code.

          But Congress did not index for inflation the income threshold over which families qualify for this extra tax. So now Congress must annually “patch” the AMT by raising the threshold to correct this mistake. Even with the patch, the AMT still ends up falling on almost 4 million taxpayers; Congress initially intended for it to hit only a few hundred.

          The AMT is a policy failure. Congress should not compound it by adding a new Buffett Rule on top of it.

http://www.heritage.org/research/reports/2011/10/the-buffett-rule-fair-to-no-one

 

 

 

6.  Investment Income

 

Let's move away from Warren Buffett and generalize the subject to all investors.  Investment income (from capital gains and dividends) results from making investments; it does not appear out of thin air.  It was taxed previously. 

First the income was taxed at the corporate level (the corporate tax rate is 35 %).  Then it is taxed again at the personal level at 15 % for dividends and capital gains.  The combined rate of 50 % is much higher than the simplistic 15 % number.

 

7.  Taxmageddon Is Coming!

If Obama and Congress fail to act this year, the Bush Tax Cuts will expire.  This will result in a huge tax increase on January 1, 2013.  The Washington Post called the looming tax increase "Taxmageddon."  It is estimated that the tax increase will amount to $494 billion (almost $500 billion) in 2013, and higher amounts in succeeding years. 

http://www.heritage.org/research/reports/2012/04/taxmageddon-massive-tax-increase-coming-in-2013

 

Although these tax increases will not start raising new revenue until next year, they are having a negative impact on the economy today.  The uncertainty caused by Taxmageddon is slowing job creation and keeping millions of American workers from going back to work.

Taxmageddon has various sources.  Almost 34 % of the tax increases come from expiration of the Bush Tax Cuts (2001 and 2003); about 25 % of Taxmageddon comes from expiration of the Payroll Tax Cut; about 24 % comes from the AMT patch; the remaining 17 % comes from the 3.8 % Obamacare surtax and other miscellaneous tax increases.

A $500 billion tax increase for just one year is unprecedented!  Usually tax and budget policies are evaluated over a 10-year period.  A 10-year tax increase of Taxmageddon's magnitude would be absolutely huge!

 

8.  Obamas' and Bidens' Tax Returns

The Obamas and the Bidens released their 2011 Tax Returns on 4.13.12.  Barack and Michelle Obama had an Adjusted Gross Income (AGI) of $789,674 and paid $162,074 in federal taxes.  Their effective federal tax rate is 20.5 %.  About half of their income is his salary and the other half is from sales proceeds on his books.

The Obamas contributed about 22 % to charitable organizations and the Bidens gave about 1.5 % to charities.

 

B.  Obama's Class Warfare Theme

 

1.  Income Redistribution

 

Obama seems intent on pushing class warfare in his speeches and writings.  This is nothing new; think back about four years ago during the 2008 presidential campaign when candidate Barack Obama had a chance encounter with "Joe the Plumber."  In response to Joe Wurzelbacher's question, Obama gave an accidental glimpse into his ideology by saying "I think when you spread the wealth around, it’s good for everybody."   This is income redistribution.

 

 

2.  Miserable Record

 

Under Obama's watch, our economy has been stagnant with consistently high unemployment (over 8 %) for three years.  His $800 billion Stimulus program failed miserably without helping the recovery.  He has racked up huge deficits each year and has added $5.0 trillion to the National Debt.

 

Obama knows he cannot run for re-election based on his record.  Accordingly, he is attempting to divert the voters' attention away from the economy by igniting class warfare (envy for someone who makes more money than you). 

 

 

3.  No Budgets for Three Years 

 

Obama uses his federal budgets to convey his income redistribution ideas (tax increases) to Congress.  Because his ideas are so out of touch, he has gone three years without an approved budget. 

 

The 2012 Budget that Obama submitted to Congress last year was soundly defeated in the Senate by a 97 to 0 vote!  His 2013 Budget, which includes numerous recycled tax hikes, suffered a similar fate.  Obama's 2013 Budget was defeated unanimously in the House 414 to 0! 

 

Obama and Democrat Senate Majority Leader Harry Reid have gone three years without an approved federal budget.  In fact, January 24, 2012 marked the 1000th day since the U.S. Senate passed a budget.  [Today marks 1082 days without a federal budget.]

 

 

This is a profound dereliction of duty.  To keep the government running, Congress has had to resort to numerous Continuing Resolutions.  These short-term measures inject uncertainty into a troubled economy and hinder an economic recovery.  Also we have had huge deficits (over $1.3 trillion per year) that add to the National Debt.

 

Why would Obama submit a budget that Congress will not accept?  The answer is pure politics.  By stirring up class warfare animosity, he thinks voters will swing in his direction.  It is all about getting re-elected.

 

The 2013 Budget includes this message from Obama:

 

            We built this Budget around the idea that our country has always done best when everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules.

 

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/message.pdf

 

 

 

C.  Who Pays the Taxes?

 

1.  General

 

The highest-earning families and businesses already pay the lion’s share of the federal income tax burden.  A recent IRS publication provides some basic facts on income tax rates and tax shares.

 

Source:  U.S. Department of Treasury, Internal Revenue Service, Individual Income Tax Rates and Shares, 2008, (September 20, 2011).

 

http://www.irs.gov/pub/irs-soi/11intr08winbul.pdf

 

 

The report reveals that the top 1 % of income earners paid 38 % of all federal income taxes in 2008; and the top 10 % of earners paid 70 % of the total taxes.

 

Taxpayers who had incomes over $200,000 earned 32 % of the total income and paid 52 % of the total income taxes.

 

The Total Individual Income Tax for 2008 was $1.032 trillion; the Average Tax Rate for taxable returns was 13.6 %.

 

 

Taxpayers filed 142.5 million Tax Returns in 2008.  Out of those, 90.7 million returns (63.6 %) were classified as taxable returns.  (A taxable return is a return that has a total income tax greater than $0.)  The 63.6 % is the lowest percentage in over 23 years.  This means that 36 % of the tax filers paid no tax.  [100.0 % - 63.6 % = 36.4 %]

 

Of course, many people do not even file an income tax return.  The IRS Form 1040 states you are not required to file a tax return for 2011 if your income was under $9,500 (single), or under $19,000 (married filing jointly).  People who receive the Earned Income Credit or Additional Child Tax Credit must file.

 

In the last 25 years, the tax code has been structured so that poor people and lower middle-income people pay no tax.  About 50 % of Americans pay no tax at all!  Based on data from the IRS, The Heritage Foundation determined:

 

          The percentage of people who do not pay federal income taxes, and who are not claimed as dependents by someone who does pay them, jumped from 14.8 percent in 1984 to 49.5 percent in 2009.

          That means 151.7 million Americans paid nothing in 2009. By comparison, 34.8 million tax filers paid no taxes in 1984.

 

http://blog.heritage.org/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/

 

 

The Heritage chart showed that 34.1 % of Americans paid no federal income tax in 2000 and 49.5 % in 2009; with this steep upward trend, you would expect the chart to show about 52 % for 2011We are at a tipping point in this country; when less than half of the people are paying taxes, the future of our nation will be in trouble! 

 

 

 

2.  Summary by Percentile Group

 

I summarized the information from this IRS report to show taxes paid in 2008. 

 

 

http://www.irs.gov/pub/irs-soi/11intr08winbul.pdf

 

 

 

The following statements describe the taxes paid by percentile groups: 

 

  1. 1.     The top 0.1 percentile of income earners (those with an Adjusted Gross Income over $1.8 million) earned 10 % of the total income and paid 18 % of the total taxes.
  2. 2.     The top 1 percentile of income earners (those with an AGI over $380,000) earned 20 % of the total income and paid 38 % of the total taxes.
  3. 3.     The top 5 percentile of earners (those who earned over $160,000) earned 35 % of the total income and paid 59 % of the total taxes.
  4. 4.     The top 10 percentile of income earners (those with income over $114,000) earned 46 % of the total income and paid 70 % of the total taxes.
  5. 5.     The top 25 percentile of earners (those who earned over $67,000) earned 67 % of the total income and paid 86 % of the total taxes.
  6. 6.     The top 50 percentile of earners (those who earned over $33,000) earned 87 % of the total income and paid 97 % of the total taxes.
  7. 7.     The bottom 50 percentile earned 13 % of the total income and paid less than 3 % of the total taxes.

 

 

3.  Summary for Higher-Income Earners

 

I summarized the information from the IRS report for higher-income earners (taxpayers with incomes over $200,000).  

 

 

http://www.irs.gov/pub/irs-soi/11intr08winbul.pdf

 

 

The following statements can be said about Higher-Income Earners:

 

  1. 1.     Taxpayers 200K to 500K (AGI from $200,000 to $500,000) earned 13 % of the total income and paid 19 % of the total income taxes.
  2. 2.     Taxpayers 500K to $1 million (AGI from $500,000 to $1 million) earned 5 % of the total income and paid 9 % of the total taxes.
  3. 3.     Taxpayers over $1 million (AGI over $1 million) earned 14 % of the total income and paid 24 % of the total taxes.
  4. 4.     The higher-income group -- Taxpayers from 200K to over $1 million (AGI over $200,000) earned 32 % of the total income and paid 52 % of the total income taxes.
  5. 5.     The Average Tax Rate for this group was 21.9 %.

 

 

4.  Summary for All Tax Returns

 

With Total for All Taxable Income Tax Returns:

 

  1. 1.     About 90,660,000 taxable Tax Returns were filed in 2008 (where Income Tax was over $0).
  2. 2.     The Total Adjusted Gross Income (AGI) for these Tax Returns was $7,583.5 billion ($7.584 trillion).
  3. 3.     The Total Income Tax for all Tax Returns was $1,031.6 billion ($1.032 trillion).
  4. 4.     The Average Tax Rate for all of the taxable Tax Returns was 13.6 %.

 

 

5.  General Comments about Taxes

 

Some people might wonder why I would devote so much space to this subject.  First, it helps when people have the facts about who pays the taxes.  It is easy to see that higher-income taxpayers are already paying a very high percentage of the total taxes.

 

Also many of the small businesses fall into this $200,000 - $250,000 category.  Roughly two thirds of small businesses are taxed at this rate. 

 

Obama wants to dramatically increase taxes on the "rich."  What if the feds confiscated 100 % of the gross income from the taxpayers who made over $1 millionThat would amount to $1.068 trillion (2008 study).  This amount is less than the federal deficit for one year!  (Deficits have been running over $1.3 trillion per year under Obama.)

 

Obviously, this is ridiculous and far-fetched, but it makes a point.  People would not stand for it; they would have no incentive to earn money; and they would leave the country in droves!  However, it helps to put the government's spending and deficits into perspective. 

 

I might also point out that the Total AGI for all taxpayers ($7.58 trillion) is about half of our $15.6 trillion National Debt.

 

 

 

6.  Total Federal Government Revenue

 

Of course, all of the above figures dealt with Individual Income Taxes (for 2008). 

 

The federal government receives revenue (taxes) from various sources.  According to the Congressional Budget Office (CBO), the Actual Revenue and Outlays for 2011 were:

 

 

CBO's Baseline Budget for Fiscal Year 2011

 

 

Description                             Actual FY 2011 Amount ($ Billions)

 

  Revenue

  Individual Income Taxes                $1,091

  Social Insurance Taxes                     $819

  Corporate Income Taxes                  $181

  Other                                                $211

    Total Revenue                              $2,302

 

  Outlays -- Total                              $3,598

 

  Deficit                                             $1,296

 

 

 

Source:  CBO, The Budget and Economic Outlook: Fiscal Years 2012 to 2022, January 31, 2012.

 

http://www.cbo.gov/publication/42905

 

 

The federal government took in $2.3 trillion and spent $3.6 trillion in FY 2011.  When the government spends $1.3 trillion more than it takes in, that produces a $1.3 trillion deficit.

 

 

 

 

CONCLUSION

 

Under the Buffett Rule, businesses and families earning $1 million or more would pay a minimum 30 % effective tax rate.

 

The Buffett Rule would raise a paltry $47 billion over 10 years, according to a recent report by the Joint Committee on Taxation.  Think about it -- $4.7 billion per year out of a $3.6 trillion annual budget is a miniscule 0.13 %!

 

Clearly, the Buffett Rule is not about raising revenue; it is about Obama pushing class warfare in a feeble attempt to win re-election. 

The Buffett Rule would be counterproductive from a revenue standpoint.  Obama is pursuing a gimmicky and farcical approach.

Raising taxes during a recession has never been viewed as a sensible policy.  The economy is stuck in neutral, and we need to put it in gear.  A tax increase at this time would have a very chilling effect on the economy. 

Obama seems intent on pushing class warfare.  Clearly, this will be a major theme in his re-election campaign. 

Top earners are already paying more than their "fair share" of taxes.

 

The top 1 % of income earners paid 38 % of all federal income taxes in 2008; and the top 10 % of earners paid 70 % of the total taxes.

 

 

Taxpayers who had incomes over $200,000 earned 32 % of the total income and paid 52 % of the total income taxes.

 

The Total Individual Income Tax for 2008 was $1.032 trillion; the Average Tax Rate for taxable returns was 13.6 %.

 

About 50 % of Americans pay no tax at all!

 

The percentage of people who do not pay federal income taxes, and who are not claimed as dependents by someone who does pay them, jumped from 14.8 percent in 1984 to 49.5 percent in 2009.

 

That means 151.7 million Americans paid nothing in 2009. By comparison, 34.8 million tax filers paid no taxes in 1984.

 

___________________________________________

 

 

Bio for Henry W. Burke

 

Henry Burke is a Civil Engineer  with a B.S.C.E. and M.S.C.E.  He has been a Registered Professional Engineer (P.E.) for 37 years and has worked as a Civil Engineer in construction for over 40 years. 

 

Mr. Burke had a successful 27-year career with a large construction contractor, where he was a Project Engineer, Engineer-Estimator, Superintendent, Senior Engineer, and Training Manager.

 

Henry Burke serves as a full-time volunteer to oversee various construction projects. He has written numerous articles on education, engineering, construction, politics and our economy. 

 

 

 

Henry W. Burke

E-mail:  hwburke@cox.net

 

P. S.  If you desire to have a copy of the Appendix which documents my data, please e-mail me with your request:  hwburke@cox.net

  

 

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