Buffett Rule fails the tax reform test

posted at 12:45 pm on February 8, 2012 by Jazz Shaw

I really enjoyed reading a new take on an old subject this week at The Fiscal Times. Liz Peek takes a look at a subject which is quickly leaving the realm of policy discussion and becoming a full blown campaign theme on Team Obama. We’re speaking, of course, about the now famous Buffett Rule which the President is touting at each and every campaign stop he makes. It plays well, particularly if his assumption that Mitt Romney will still be the nominee is correct. After all, Mitt’s a very wealthy guy and we now know that he payed a less than 15% tax rate. That should be enough to tick off the plebes, or so the thinking goes inside the war rooms at the DNC.

But Peek looks over the theory behind the rhetoric and asks the question which the GOP nominee will have to answer on the campaign trail. Does the Buffett Rule actually make sense in terms of realistic, promising tax reform? Her conclusion… not so much.

The law, based on the proposed rule being introduced into both houses of Congress, provides the president with yet another reason to blast Republicans for their mule-headed attitude towards taxes. Best of all, it focuses Mr. Obama’s campaign; it’s a remedy for the resentful.

Beyond those virtues, the Buffett Rule is an empty shell. We need serious and fair-minded reform of our tax code, not another gimmicky fix. We need to analyze whether the deductions and loopholes that cost Uncle Sam nearly a trillion dollars per year in lost revenues are appropriate and effective, whether the goals of prior generations are still relevant and – yes- whether our system is fair. There is a reason why rich people sometimes end up with lower tax rates. It is not because the tax code is regressive; on the contrary, the top one percent of filers pays nearly 40 percent of the total…

The goal of encouraging entrepreneurs and risk-takers through favorable taxation was adopted in 1921; the rules have changed from time to time, but the philosophy has been nearly a constant. The question today should not be: “has this approach favored the wealthy?” This is a given. Instead, we should ask: has the policy worked? If not, is this Buffett Rule the best way to fix what is broken?

I think Peek really nails it in the final quoted paragraph. There is no sense in trying to dance around on the head of a pin during the debates and pretend that the existing tax code doesn’t offer an opportunity for the wealthy and successful to keep more of their money than they would if they had to pay 39% on every dime they took in. That’s a given. The first question to tackle is, are we – as a national economy – getting the best bang for our buck out of that investment in the form of reduced direct revenues to the federal coffers.

Second – and this may be the part which never receives any real attention – does this even qualify as “tax reform” which, like the weather, everyone talks about but nothing is ever done? She point out that rather than simplifying and broadening the tax code, which plenty of people on both sides of the aisle seem to agree is a good idea, the Buffett Rule adds on yet another layer of complications, exceptions and clauses which those with skillful tax accountants will find a way around in short order anyway.

This is not intended as a discussion of the “best” solution on taxes, and I know many of you still favor completely different approaches. (e.g. flat tax, fair tax, consumption tax) But given the difficulty in trying to completely replace the code with something new, we may have to settle for fixing what we have – at least for now. And the conclusions Peek draws should be part of that conversation.


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It figures that a thread on tax reform would garner almost zero responses. That said, I’m convinced that Obama is one of the greatest living drama queens evah !

DevilsPrinciple on February 8, 2012 at 12:50 PM

But given the difficulty in trying to completely replace the code with something new, we may have to settle for fixing what we have – at least for now.

Fixing the current broken and flawed system will be much harder than replacing it with something less broken.

Of course, both are difficult which is why politicians do neither.

They tweak around the edges so they have something to report to the folks back home but rarely are major, permanent changes made to the behemoth that is U.S. tax law.

JadeNYU on February 8, 2012 at 12:50 PM

The law, based on the proposed rule being introduced into both houses of Congress, provides the president with yet another reason to blast Republicans for their mule-headed attitude towards taxes

Further proof that the federal income tax’s primary purpose is not the efficient collection of revenue for the federal government.

It’s primary purpose is as a blunt instrument of political power and influence with a heavy dose of social engineering thrown in.

We will never get our fiscal house in order until we as a nation dedicate ourselves to the proposition that taxes are for raising revenue for truly necessary government expenses and nothing more.

MessesWithTexas on February 8, 2012 at 1:00 PM

It’s primary purpose is as a blunt instrument of political power and influence with a heavy dose of social engineering thrown in.

We will never get our fiscal house in order until we as a nation dedicate ourselves to the proposition that taxes are for raising revenue for truly necessary government expenses and nothing more.

MessesWithTexas on February 8, 2012 at 1:00 PM

I’m not optimistic about the chances of the second paragraph above, mainly due to the first. Very powerful groups and individuals are very completely addicted and dependent on those things. It would be easier to bootstrap all the poor and weak in this country up to the middle class than wean the powerful from what they derive from the current system.

Marcola on February 8, 2012 at 1:06 PM

This reminds me of the illegal immigration problem at our southern border which reminds me of a leaky faucet. Gotta stop the flow, then replace the faulty parts. So, quit the overspending and pass a budget, then we can see how to optimally tailor the tax reform. Oh, and if it’s just federal revenue we’re looking for, well, if more people had jobs, and full-time jobs, and better-paying jobs, abundant tax revenues would be flowing into the federal coffers, even with the current allegedly “unfair” system. Then again, in a prosperous USA, few would complain, or even notice.

stukinIL4now on February 8, 2012 at 1:16 PM

Rebar on February 8, 2012 at 1:12 PM

These people are a nightmare. Heaven help me, but Ron Paul is right about them.

totherightofthem on February 8, 2012 at 1:20 PM

There’s only one answer here and we all know it: “nein, nein, nein.”

Sammo21 on February 8, 2012 at 1:20 PM

Jazz, the next time you sit down to eat a plate of spaghetti, take hold of one piece of that pasta and without pulling it out of the pile, try to figure out where the other end is.

The current tax code looks exactly like that plate of spaghetti and by putting on a different sauce or pulling out a couple of pieces, you still have a plate of spaghetti.

The tax code needs to be…SCRAPPED and replaced with a simpler code. There is absolutely no need for any deductions(tax loop-holes) of any kind for anyone or any corporation, IF the tax rate is reasonably low across all income levels or consumption levels.

belad on February 8, 2012 at 1:30 PM

Flat tax

darwin on February 8, 2012 at 1:32 PM

When a conservative is held up as an example…the press starts the vetting process of that individual, 2 seconds after. Tax returns, baby sitters, neighbors from 30 years ago, medical records, grade school marks, etc.
When a liberal is used as an example….cricketts! Getting tired of it yet?

KOOLAID2 on February 8, 2012 at 1:36 PM

Is it blasphemous to point out that the Buffett Rule will not change the rate of tax that the slob Warren Buffett pays?

slickwillie2001 on February 8, 2012 at 1:47 PM

belad – sorry to have to say this, but you’re incorrect. Folks who live in houses with mortgages, will miss the deduction for interest paid on their mortgages (not to mention real estate taxes) and while that will be bad enough, folks living in States (and some cities, e.g., New York City) will no longer be able to deduct those taxes, because all State taxes that I know of are based on your Federal Taxable income.
And few, if any, States can afford to change anything now.

Yes I wish you were right, but to do that changeover, overnight,will kill the real estate market (which used to be one of the five largest industries in the Country), kill the mortgage lenders (both good and bad)and ruin a lot of homeowners. There has to be a loooong lead time to get into that sort of tax change.

And once we have a flat tax of say 15%, how long before the Progressives have it at 20%?

realwest on February 8, 2012 at 1:47 PM

Childish jealousy is exactly the sort of thing that builds sound government policy.

If you’re an idiot. Or a Democrat.

Same thing.

NoDonkey on February 8, 2012 at 1:50 PM

We need to analyze whether the deductions and loopholes that cost Uncle Sam nearly a trillion dollars per year in lost revenues are appropriate and effective

Cost Uncle Sam? Lost revenues? Are you kidding me?

What an appalling mind-set! Whose money does she think it is anyway?

ss396 on February 8, 2012 at 1:53 PM

We will never get our fiscal house in order until we as a nation dedicate ourselves to the proposition that taxes are for raising revenue for truly necessary government expenses and nothing more.

MessesWithTexas on February 8, 2012 at 1:00 PM

Exactly right!

I would suggest that the first thing is to re-establish what the governments job is. Then how do we pay for it. My assumption is that we’d find we have more than enough money coming in to handle the job they are supposed to do, and no where near enough to do all the social enginerring they WANT to do.

landowner on February 8, 2012 at 2:03 PM

Cost Uncle Sam? Lost revenues? Are you kidding me?

What an appalling mind-set! Whose money does she think it is anyway?

ss396 on February 8, 2012 at 1:53 PM

Yup by that logic I am going to have a revenue shortfall of 2 billion dollars this year! Wow…who would have thought it.

If you don’t have it don’t spend it. If you were never going to get it, it cost nothing!

Plan the budget on 0% growth and what we actually need to do the job the constitution said the government was supposed to do and nothing more…

landowner on February 8, 2012 at 2:08 PM

Yes I wish you were right, but to do that changeover, overnight,will kill the real estate market (which used to be one of the five largest industries in the Country), kill the mortgage lenders (both good and bad)and ruin a lot of homeowners. There has to be a loooong lead time to get into that sort of tax change.

And once we have a flat tax of say 15%, how long before the Progressives have it at 20%?

realwest on February 8, 2012 at 1:47 PM

The real estate market is in ruin right now, you can’t kill it, it’s already dead for the next 10-15 years. Are you a real estate broker/investor? A asset that should depreciate, over time, like all other things is a poor investment. The American public(sheeples) have been brainwashed into believing that home ownership is an investment. Well how much of a sound investment is your home after the bubble burst?

If now is not a good time to cut that deduction loose….when? You sound just like the critters inside the Beltway…”Kick the can down the road, I got mine, the rest of you can go figger!”.

belad on February 8, 2012 at 2:12 PM

realwest on February 8, 2012 at 1:47 PM

So maybe… just maybe… that tax deduction on INTEREST ON DEBT is a bad idea.

I own my home free and clear (9.5 years of mortgage). So I get absolutely no interest deduction for being a homeowner. I’m also not paying the bank interest, which actually means more to me and why I paid the loan off quicker.

Remove the deductions, and just lower the tax rates.

But any change at all is going to hurt “somebody” and get you demonized for trying.

SnowSun on February 8, 2012 at 2:23 PM

It’s bad enough that a “rich person” working at a highly skilled job 60-80 hours per week gets to pay the highest tax rate; I guess there’s no incentive to risk that gradual wealth accumulation by starting a small business (as well as risking personal bankruptcy.) There’s no property tax on gold, diamonds, fine art, etc. Of course, that won’t create many jobs, either.

spudmom on February 8, 2012 at 2:25 PM

I take it there’s not a single J-School graduate out there that can follow the dots to the municipal bond market, and what will happen to that under a new alternative minimum tax that eliminates non taxable interest…for those above a certain income.

Or do we just let the Poli Sci retards pass the bill, and come back to it in two months to find out what was in the bill. Shazaam! A new mortgage tax. Where did that come from…

MNHawk on February 8, 2012 at 2:29 PM

The goal of encouraging entrepreneurs and risk-takers through favorable taxation was adopted in 1921; the rules have changed from time to time, but the philosophy has been nearly a constant

What are you saying- that Steve Jobs or Mark Zuckerberg would sit on the sidelines because of high tax? I don’t buy the argument that the best and brightest will decide to live average lives because of a 30% tax bill- which is still low compared to most of Europe and not even very high in the US historically.

Mark Zuckerberg is paying a $2 bil tax bill- is it because he’s full of bitter resentment?

bayam on February 8, 2012 at 2:53 PM

class warfare may win elections, but it won’t fix the economy. we are about to cross that threshold and destroy America

burserker on February 8, 2012 at 3:34 PM

Taxes are supposed to raise money to fund government operations. Not to make some people feel better or feed their resentments of others, or to redistribute money from one group of people to the other.

Can we ever talk about what form and level of taxation brings in the most revenue at the least opportunity cost to the economy? We certainly have almost 100 years of experience now with the income tax and 70 years with the payroll tax, and we have decades of experience in Europe with VATs.

rockmom on February 8, 2012 at 3:43 PM

Mark Zuckerberg is paying a $2 bil tax bill- is it because he’s full of bitter resentment?

bayam on February 8, 2012 at 2:53 PM

Why should I care if he pays $2 billion or $2, if the government is funded?

rockmom on February 8, 2012 at 3:44 PM

“Mark Zuckerberg is paying a $2 bil tax bill- is it because he’s full of bitter resentment?

bayam on February 8, 2012 at 2:53 PM”

No, they won’t sit on the side lines, they will just defer the bill and try to negotiate it like Warren Buffets company does.
Rich guy Warren wants to pay higher taxes, no law needed, pony up Warren, pony up Mark. Give till it hurts and leave the rest of us out of it. The truth is they won’t stop at Warren, his company or any other company. They will be coming for those of us in the middle class, they spend it, we pay.

Africanus on February 8, 2012 at 3:49 PM

Rich guy Warren wants to pay higher taxes, no law needed, pony up Warren, pony up Mark. Give till it hurts and leave the rest of us out of it.

Mark is going to pony up to the point where he could find ways to drastically lower his tax bill… but decided not to.

The truth is they won’t stop at Warren, his company or any other company.

News flash- tax rates are at historic lows. Yet some people keep talking about how the government is ‘stealing’ their money- classic baby boomer whining from the generation of ‘me me me’ and ‘I want mine now’.

http://economix.blogs.nytimes.com/2011/05/31/are-taxes-in-the-u-s-high-or-low/
http://www.businessinsider.com/gundlach-presentation-dollars-cents-2011-9#-8

bayam on February 8, 2012 at 4:13 PM

they could solve the problem real easy, without raising tax rates, just come with a new form for earners of over 1m dollars from all sources, 1040-EZ-W no deductions or exemptions aint going to happen but would fun to seen the hollering.

RonK on February 8, 2012 at 4:52 PM

News flash- tax rates are at historic lows. Yet some people keep talking about how the government is ‘stealing’ their money- classic baby boomer whining from the generation of ‘me me me’ and ‘I want mine now’….

bayam on February 8, 2012 at 4:13 PM

Do you work for income or just peanuts?

The reason taxes have been higher in the past was there were a whole lot more deductions(loop-holes) for taxpayers to take advantage of.

While I’m at it, if revenue was the real issue, why are there credits…like unEarned Income, Child-care. Did the gubbmint issue children and therefore the care has to be reimbursed? Why is it that if I didn’t stay in school and decided that pumping gas or flipping burgers would be enough to live on and support a family, because I don’t control my hormones, that I am entitled to someone else’s income?

You are just like all those other lefties that say, “You owe it because living in the US and the opportunity it affords you requires you to put it back into society.”, BS. If I’m successful and have a thriving business, I employ people and produce products that SOCIETY wants or needs and without me SOCIETY loses out on my entrepreneurship. I put in the sweat and hours to get the education. I put in the sweat and hours to create the product or service you and the rest of SOCIETY wants or needs. I earned it, pal. Not you, not your neighbor and certainly not the gubbmint! The fact that I employ people and make products and services available to the public is my contribution to SOCIETY.

Now you and Warren and Bill and anyone else can send in your check to the IRS to ease your conscience.

belad on February 8, 2012 at 5:08 PM

I’ll chime in on a dead post

tax reform will take time if Congress ever wants to deal with it…people living in high-cost areas paid more for their houses and they are paid more as a result…having lived in NY, I can say we had no more money in the bank after house payments than we had living anywhere else…(in fact was probably less because the higher salary to cover cost of living put us into higher tax brackets…meaning the only true winners were the federal and state govt’s).

eliminating the mortgage deduction will thus kill those people living in the high cost areas. kill the deduction for real estate taxes as a start…the people I described above are mostly likely heavy into the antiquated AMT anyway.

teejk on February 8, 2012 at 5:20 PM

…another layer of complications, exceptions and clauses which those with skillful tax accountants will find a way around in short order anyway.

By design…?

The wealthy give to campaigns, including Obama’s. We don’t really believe Obama wants to piss off his campaign donors by taxing the crap out of them, do we? Nor do the congressmen who will vote for it. I’m quite sure it is no accident that a skilled accountant, which the wealthy have aplenty, can weave their way through the tax code to the least possible taxes paid for their clients.

So they can stump on the campaign trail about passing a tax hike on the “very rich”, while their accountants are deftly maneuvering through the intentional loopholes to keep the money behind their campaigns happy.

Funny thing how the government’s revenues go down when they increase taxes…

gravityman on February 8, 2012 at 5:23 PM

MessesWithTexas on February 8, 2012 at 1:00 PM

So very very true.

Congress uses the tax code as a bribery system. They fiddle and tweak it to suit those who feed them the money to stay in power. I have ZERO faith that Congress will change the tax code to something with limited or no deductions and loopholes, because then they will lose their major bargaining chip with the lobbyists/corporations/special interests. Why would the people in power who control the tax code vote to change the tax code to reduce their own power?

gravityman on February 8, 2012 at 5:35 PM

The tax-fairness issue plays well for Obama, but it is also an intentional diversion from the more critical issue – government spending.

Any time some one brings up the subject of taxes we should get the train back on track by insisting on controlling the spending first, then after that has been accomplished, reform taxes.

Rich H on February 8, 2012 at 7:26 PM