Obama's "Buffet law"

I am looking for a factual answer, not a debate. Does the issue Obama addresses with his proposed Buffet law an actual issue? Is it true that some super-rich pay a lower tax rate than people with a much lower income? If this is an actual phenomenon, how is it accomplished, since tax rate brackets are progressive?

I’m sure at least one provision of the “Buffet Law” will be “everybody has to take a clean plate on each trip.”

[sub]Sorry, that just looked so funny[/sub]

Income tax brackets are progressive. But there are a lot of other taxes besides income tax (like payroll tax and sales tax), and most of the money the super-rich make comes from capital gains, which is not considered “income” for the purpose of income tax. There is a capital gains tax, too, but it’s not as high as the upper income tax brackets.

There are a variety of games that can be played including assests held in trusts and real property owned by incorporated entities. Buy splitting the taxable income between multiple entities and beneficiaries of a company you end up with a ton of money spread over multiple folks to dilute tax burden:

Imagine:
The “drachillix estate event venue inc.” generates 1 million per year in income between events held there and held investments (mostly investments).
the drachillix estates and pays $500,000 in expenses maintaining the estate, its staff, its grounds and vehicles, the 14 time shares, etc.
The Drachillix estate pays Drachillix (CEO) $100,000/year
The Drachillix trust pays Drachillix Mom (Venue manager) $100,000 /year
The Drachillix trust pays Drachillix Dad (Grounds Manager) $100,000 /year
The Drachillix trust pays Drachillix Sister (Food service manager)$100,000/year
The Drachillix trust pays Drachillix Brother (Marketing manager)$100,000/year

The drachillix family all lives on the estate, drive estate owned vehicles, and eat at the estate kitchen, have group medical insurance provided by the company.

On paper, The estate broke even, zero taxable income on $500K in revenues, each individual employee made $100K a year and they pay taxes accordingly . Even though they live in a veritable palace, they have no real bills, and probably only hold a tiny number of events most of which is handled by temp staff/caterers during the event in question.

I am just plugging in even numbers im sure there are plenty of ways it could be optimized. to where individuals could be making much less on paper and performing “tasks” for the family biz like business trips “researching” new menu options in Mexico or Japan, shopping for proper wine stocks for the cellar in France.

See how that works

Why not just ask Warren Buffett?

This is quite a common feature of the tax system in countries where they try to use tax laws to incentivize or discourage particular kinds of behaviour - e.g. offering tax credits or tax deductions for charitable giving, educational expenditure, scientific research or a whole slew of other expenditures which serve goals deemed socially useful.

In the nature of things, you don’t give tax incentives for expenditures, however important, which most people will make with or without an incentive, like putting groceries on the table or buying shoes for your children. You mostly offer tax incentives for discretionary expenditures and behaviours. And, of course, the wealthier you are, the easier it is for you to respond to the incentives and tailor your behaviour accordingly. After all, you’ve already got all the groceries and children’s shoes you could possibly want.

So if you look at who is actually taking advantage of various tax incentives, this is mostly heavily skewed towards those with high income. This is fine in terms of diverting money towards socially useful goals, but perhaps not so fine in terms of overall equity in the tax system or social solidarity. There are various ways you can tackle it by, e.g, capping the aggregate tax incentive deductions that a taxpayer can claim, either as a percentage of his income or in absolute dollar terms or some combination of both. If you do this effectively, though you will reduce the flow of money towards socially desirable purposes. On the other hand (unless you lower tax rates to offset) you’ll increase your tax revenues, so you have the option of directing public money towards those goals.

Or read the entire article at The New York Times.

Sorry, I don’t have much to add, but just as I turned on the TV a few minutes ago the news was on and the report was about this bill. The sound bite was President Obama saying “This isn’t class warfare. It’s MATH” which has got to be one of the best quotes I’ve heard from a politician in a while, even though I don’t actually know the full context of the statement!

What I don’t understand (in Buffet’s longer article which I cited) is the distinction he’s making between income tax and payroll tax. As I understand it, income tax is paid by the person, and payroll tax is paid by the employer. Regardless of where he got his income from, his “taxable income” – which is AFTER deductions – should have been taxed at 35%. (More precisely, the portion of his income that was above $373,650 should have been taxed at 35%) Where did the 17.4% come from?

Almost certainly he’s saying that the $6.9m or whatever it was he paid in taxes is 17.4% of his earnings for the year in question. What is and isn’t “taxable income” is purely statutory, there is no universal definition. In the United States, you can make $5 billion a year off of capital gains and you will only pay 15% on that $5 bn.

But yes, the $100,000 salary Buffet draws from Berkshire he pays on that at a rate higher than 17%, but since that vast portion of his income isn’t “earned income” but is instead capital gains, he pays only the 15% rate on most of it.

No, that is simply incorrect.

Salary, wages, tips, and such are taxed at one rate.

Return on investments is taxed at another rate, much lower because of the myth that billionaires create jobs by investing their money. But the fact is that the salary of the president of Monstro Hedge Funds Ltd is a fairly small percentage of what he is paid by MHF Holdings Inc. What he gets are options on shares, which he sells for much more than he paid for them, and his income becomes capital gains. That income is taxed at the lower rate.

Thousands of other slick tricks create ways to spend money on yourself that was never actually your money, but you are allowed to enjoy the benefits of having it spent. You can’t do that, because it costs a couple of hundred thousand dollars to set up the slick tricks, and pay the lawyers. You don’t have a spare hundred thousand to spend on half a million in luxuries you don’t have to pay taxes on. But MHF Holdings regularly spends six or seven million creating twenty or thirty million in luxuries for their top five or six officers to enjoy. You spend a month in Hawaii, with a luxury car, and a chauffer, maids, and entertainment, because MHF is having an Executive Training Retreat at their “Managemant School” on Maui. You don’t pay taxes on it, and MHF Holdings deducts the cost of pampering your vacation as a business expense. In fact, it doesn’t even count as your vacation, since you are on the job.

The new law won’t stop that, of course, but it will set the bar on income the same for all types of income, which is what you thought it was. Realizing that is was unfair is called Class Warfare.

Tris

I’m not trying to be stupid. I honestly don’t get it.

Plain old wages are entered on line 7 of Form 1040.
Taxable income on line 8.
Dividends on line 9.
Capital gains on line 13.
Other income on other lines.
They’re all added together on line 23 and taxed at the same rate.

Where is the special 15% for capital gains?

Ok, clever lawyers can find clever deductions.

Also dividends and capital gains are taxed at 15%: this was part of the GWBush tax cut plan. And payroll taxes are 12.4% (inclusive of the employer contribution) until you hit $106,800: then they drop to zero. Interest on municipal bonds is not taxable at all by the federal government. So hedge managers who claim that their income comes from investments get taxed in the 15% region, while their staff will send higher shares of their income to big guv.

Meanwhile corporations have paid out a declining share of their income in taxes due to the proliferation of loopholes after the 1986 reset. For example, 12 corporations paid effective tax rates of negative 1.5% on $171 billion in profits.

Analysis of the revenue sections of the President’s job and infrastructure bill: http://ctj.org/ctjreports/2011/09/revenue_provisions_in_the_presidents_jobs_bill.php

ETA: Google “carried interest” to learn how clever hedge fund managers exploit a loophole in the tax code to pay 15%.

If you use Schedule D you use instead use the tax worksheet on page 37 of the 1040 instructions to figure out the tax for line 44, I think. (This is my first time looking at US tax forms and I’m thankful that I never have to)

1040 Schedule D.

If you did not fill your taxes our properly it is certainly possible you could end up paying regular income tax rate on capital gains, but I think even TurboTax is smart enough to keep you from falling into that pitfall.

Nothing is quite as straight forward as that. A lot of luxury “perks” companies give top executives have to be reported as income for those executives, you can’t do an end run around the IRS by taking tons of “perks” instead of a salary at your job. When Apple gave Steve Jobs an airplane one year as a present, he made only $1 in salary, but he had to pay tax on that $80m airplane.

Likewise if I’m an executive on business travel and I drink $40,000 in wine, there is no way I can legally claim that as a valid travel expense, that is far above the IRS allowable meal reimbursement.

Not to say there aren’t some ways to do things, a “management school” could be set up like you say, but that’s not nearly as common as you’d want to believe. Most corporate executives are not going to spend weeks at a time vacationing.

The reason for the lower tax rate on capital gains is sort of two fold. Obviously it benefits the rich and the powerful and thus they were big supporters of it, but at one point in time even Clinton era Democrats supported it because they thought it would be a way for middle class people to get more gains from a booming stock market, it was felt that if you had a low tax rate on capital gains more people than would otherwise be interested might start putting money into the market directly.

And note that the long term capital gains tax rate is 0% for tax payers in the 10% and 15% income tax brackets.

Besides the rich having a larger % of their annual income coming from investment income, a lot of retirees also have a substantial amount of their annual income coming from investment income. So will this “Buffet rule” cause these retirees taxes to go up as well? That wouldn’t seem right.

No. The proposal is to ensure that people making over $1m pay a certain minimum amount of tax, so it would only affect retirees who are making over $1m.

The Ford Foundation, IIRC, is generally run by and employs the members of the FOrd family to do good works. It started off as a way to pass on the shares of Ford without paying inheritance tax or risking the controlling shares falling into (gasp!) non-Ford hands.

If you add capital gains to regular income to figure out taxes payable, then odds are you copy it from a schedule where the last line is “take 50% of the number above”. That’s about how Canada’s tax return does it.

Plus, as pointed out, at the top of large corporations are perks not available to the average Joe, and a flock of lawyers to ensure they are not acidentally turned into taxable benefits. A company, for example, can throw a party for the executives, board, customers’ presidents, etc. and all the champagne and entertainment is a tax write-off. A private jet means you can take your family wherever you need to be, and maybe only reimburse the company for the equivalent first-class airfare. How many of the last decade’s Wall Street scandals have included descriptions of a company-paid Manhattan apartment “for the use of senior executives while in town on company business?” What are the the odds “senior executives” meant more than 1 of them?