The Week In Taxes: An Explainer
Between the mad rush to complete our returns and President Obama on the road to ask the Senate to pass the “Buffett Rule,” it has been a big week in the tax world.
So let's get started.
Q: What is this “Buffett Rule” that President Obama has been promoting this week?
A: The Buffett Rule, officially the “Paying a Fair Share Act”, is being packaged as a plan to ensure that those earning a gross income of over $1 million and whose combined tax burden was less than 30 percent would have to pay an alternative minimum tax of that rate. It is named after billionaire Warren Buffett, a folk hero in the investment world and much to the chagrin of Wall Street, an advisor to President Obama. The White House projects this tax will raise $47 billion over 10 years.
The sales pitch is mostly true: the Paying a Fair Share Act, like any progressive income tax, is applied on a marginal basis, and is phased in gradually only hitting the full 30 percent past the $2 million mark. For example, a hedge fund guy whose earnings mostly fall under the capital gains tax (15 percent) grossing $2.5 million next year might have that first million taxed at a blended rate of something like 18 percent, the next million taxed at some ramp-up intermediate rate, and the remaining $500,000 taxed at the 30 percent Buffett rate.
Q: Does it have any chance of getting through the Senate?
I must say it is peculiar that a democratically elected legislative body trying to patch together a budget would find it beyond the pale to impose a tax that only kicks in after the first million dollars in gross income. If that’s enough to scare away job creators, they need better money management skills and lower maintenance families.
Q: Why would President Obama campaign on this bill if it is not going to become law?
A: He’s going to be running against Willard Mitt Romney and his 13.9 percent tax rate this fall. Mitt is able to pay such a low rate because he earns his income as carried interest, which is taxed under the capital gains rate.
Several voices have called for an end to this carried interest tax break. The Paying a Fair Share act highlights and calls out people who make their money in this way; high-earners like entertainers and salaried executives earn ordinary income, taxed at a top marginal rate of 39 percent, exceeding the minimum tax threshold.
President Obama knows this bill has no chance of passing the Senate, but the general conversation is a political winner for him with the added effect of highlighting one of his opponent's biggest weaknesses, aside from his personality.
Q: Are there any taxes that are actually too high and do potentially affect job creation?
A: Yes. The United States corporate income tax, at 35 percent, is now the highest in the world. There is bipartisan support to fix this. We don’t have to have the lowest taxes out there, but having the highest makes us less competitive selling to new markets.
Q: The Wall Street Journal wrote an op-ed against the Paying a Fair Share Act (I know, shocking). It does, however, include this quote: “A basic principle of any tax reform worth the name is to broaden the tax base in order to lower rates for everyone, not to raise them.” Can we really broaden the tax base, and if so, how?
A: Yes we can, and we can start with “vice taxes.”
For example, decriminalization of marijuana, especially here in California, may be slow in coming but is a political inevitability in the not-too-distant future. Other drugs will likely follow, but let’s just start with weed. Americans of all stripes are fond of it, supporting an underground economy that is estimated to be worth tens of billions of dollars nationwide. Tens of billions of dollars that go…where?
Think of El Chapo’s fortune as lost U.S. tax revenue. Profits from drug sales fund violence in Mexico and Central America and not infrastructure in the United States of America. There is actually money in the walls of houses in neighborhoods where buildings are falling down. This is wasteful, inefficient and foolish. A tax on drugs can provide an economic stimulus and fund the type of treatment we need if we are going to accept the fact that drugs are in our society and their use is to be managed, and not pretend like prohibition ever works.
Prostitution is another industry to take a look at. As it exists now, we have pimps, among the most morally repugnant people walking this earth, as its main economic beneficiaries, while the sex workers are forced to engage in dangerous, high-risk activity that makes them in many cases public health hazards. A taxed and legitimized prostitution industry could eliminate the pimps and provide basic health services to prevent the spread of sexually transmitted diseases.
These may be unusual suggestions, but part of sensible tax policy seems to be to look at the flow of money through our markets and find relatively unobtrusive places to capture it in order to raise revenue without overly disincentivizing consumers. Hedge fund manager compensation is a good place to start looking, but even with obstructionist opposition, if our government were to stop there, it would not be doing its fair share.
Reach Staff Columnist Matt Pressberg here.