Monday, 21 May 2012

The Buffett Rule = Nonsense

On Tuesday 11th April, in the swing state of Florida, President Obama attacked Mitt Romney (R) for not paying his ‘fair share' of taxes. This isn’t the first time that he has said such a thing; it certainly won’t be the last.

Obviously the idea of fairness is relative- what one person calls fair, another will say to the contrary. Let’s clarify the tax situation as it stands- anyone who earns $250,000+ per year must pay 35% income tax. The current rate for capital gains is 15%.

The Obama Plan

The President is making the case that anyone who earns $1million or over, will pay a higher rate of tax than middle class families which is known as the ‘Buffet Rule’ (Named after the billionaire investor and Obama supporter). Essentially this would ensure that people, who make more than $1 million per year, pay at least 30 percent of their income in taxes. Obviously there is a question that must to be asked; if the current rate of income tax is 35%, the idea of slapping a ‘fair’ tax, which is lower than the current income tax doesn’t make sense. In essence, if the ‘Buffett Rule’ becomes law, the income tax will be at 35% (stay the same) and capital gains at 30 %.( an increase of 15%) If the Bush Tax cuts expire, then the income tax will increase to 39%.

The Romney Plan

The probable Republican nominee, to face President Obama is espousing a totally different remedy for the US economy. Governor Romney is calling for an across-the-board 20 percent cut in marginal rates & an elimination taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains. The primary focus is based on lowering rates, in order to incentivise people to invest in the American economy.

The Buffett Rule - Expediency over Efficiency?

Warren Buffett has said that he pays a lower effective tax rate than his secretary does. It is hard to believe that Warren Bufffett is on a fixed salary. More like, he invests in stocks and shares which are currently taxed at 15%. His Secretary is on a fixed salary and therefore pays income tax, which is taxed at a higher rate than the current capital gains rate. So when the President slams the rich for not paying their ‘fair share’ of taxes, I contest that he is referring to capital gains, not income. If it does become law, it is projected to bring in $47 billion over 10 years, a ‘drop in the ocean’ in relation to the current deficit. Taking the above into consideration, what is the point of the Buffett Rule? Is it sound economics, or is it something else?

President Obama will put forth that America is not a fair country and that he is the only person who can level the playing field. The ‘Buffett Rule’ is based solely on that tenet, just look at his website. The jab at Governor Romney on Wednesday will be an enduring theme of the 2012 election. Obama will portray himself as a man for the lower to middle classes, looking out for the everyday person, not the rich. Governor Romney will focus on the economy at large and will look attempt to express how a $16 trillion dollar debt that continues to rise, will affect every American, not just certain classes. The nation will have to make a choice between the two; ultimately, whoever is able to offer a clearer vision of America, will win the day.

I think that this idea is complete nonsense and is proof that Obama is bereft of ideas when it comes to stimulating the economy. America needs new leadership.