Obama, the Buffet Rule, and the repetitive tax debate

2012-04-17 08:37

You will have heard US President Barack Obama yakking on about the Buffet Rule since early 2011. During government budget negotiations for the current financial year, gazillionaire Warren Buffet inserted himself into the national conversation when he said he paid a lower percentage of income tax than his secretary. In other words, middle class folks were giving up more of their income than rich people. As US accounts are running largely in the red, it cued populist repetition of this principle to increase government revenue ad nauseum.

Opposition to Obama’s Buffet Rule plan has, at last, begun to happen in a manner that isn’t just hopeless shouting about “class warfare”. Some bean counters in the Congressional Budget Office worked out that implementation of the Buffet Rule, ie implementing a 30% tax on those who earn more than $1m per year as middle-income earners, will only raise an approximated extra $47bn over the next 10 years (a period in which both parties seem to set their targets). To put that into perspective, the federal budget deficit for March 2012 alone was $198bn, and the estimated deficit for the year is $1.17-trillion. If we average this out, the Buffet Rule, should current fiscal trajectories remain constant, will add $4.7-billion to annual government revenue. A year’s worth of Buffet Rule income would act as a reduction of 2.3% for one month and virtually nothing for the annual deficit.

However, when compared to the Republican budget proposal’s tax plan for next year by Wisconsin House representative, Paul Ryan, this would become a net 10-year total gain of $250bn, according to Pulitzer Prize-winning economics reporter David Cay Johnston. The Republican budget would ease taxes on higher income earners and corporate profits, while slashing at national expenditure such as the highly popular national healthcare plan for elderly - Medicare, education grants, foodstamps, infrastructure upgrades and unemployment insurance. The Republican plan, of course, is backed by many because it maintains that those with capital create businesses and jobs. Naturally it is criticised because it sounds like rich people get to hold onto their large stashes of cash.

Although even Buffet Rule tax income may not seem significant, pure logic dictates that no singular thing will kill off the deficit and begin dealing with America’s Jupiter-sized pile of debt (which sits north of $15-trillion, and is on a continuing upwards trajectory).

The other major factor in these deliberations is a set of tax cuts implemented by the previous Bush administration, which Obama extended while cutting a budget deal with Republicans in 2011. According to the Congressional Budget Office, the Bush tax cuts are worth up to $300-billion per year. Taking inflation into account, this will result in a $3.9-trillion pile of cash over the next decade. And that is a serious pile of wonga with which to smack the deficit and debt mountain.

Obama was loudly criticised for continuing the Bush tax cuts in budget deliberations last year, but their maintenance resulted in concessions by Republicans too. It wouldn’t surprise me in the least if the Obama administration was, and is, using the Bush tax cuts as a bargaining chip. I half-expect their extension for future Republican allowances.

The justification for the cuts is also not as valid as it was under Bush. Due to the culling of jobs due to the 2008 recession, welfare has been expanded. While there may be theoretical arguments against welfare, and as many for it, this administration decided it would aid ending the impact of the recession. Welfare is paid for by tax income: tax cuts while expanding welfare is incredibly bad maths.

While there is certain to be debate as this Bush tax cut period reaches its expiry date (31 December), a Washington Post/ABC poll taken from 5 to 8 April found that 61% of Americans favour higher or equal taxes on high-income earners. In the same poll, however, voters declared that they back Mitt Romney slightly ahead of Obama to deal with the deficit. Romney is unlikely, according to electoral pledges and his embrace of the aforementioned Republican budget proposal, to raise taxes if he takes office.

Taxes and fairness will make up a large part of what you will hear between now and November’s general election. It is no secret that the percentage rates paid by incredibly wealth individuals have dropped. Since the 1960s, according to economic fairness organisation, tax rates for the top 0.1% of American earners has gone from a peak of around 51% to a low of about 25%. The top 1% of earners have seen a drop of 10 to 12 percentage points in their tax contribution, while that of the middle 20% of earners has risen by about a fifth. There also happen to be arguments over tax deductions and capital gains taxes to throw into the ring. Do energy companies deserve continued breaks? Are people who pay capital gains, or earn money off investments, being taxed twice? Is only half of America actually paying taxes? (This one is easier to answer: no – virtually everyone pays sales and other usage tax).

You’re going to hear bucketloads of ideas on all facets of government income between now and the general election – particularly as this is the most likely ground on which Republicans, through candidate Mitt Romney, can put up a fight.

But one thing is clear: America’s finances are not healthy, and whoever wins the general election is going to have to do a serious job mending them.

  • richard.fahrenfort - 2012-04-17 11:44

    America's, and everyone else's finances for that matter, can and will never be healthy. The monetary system that we live in is the biggest ponzi scheme of them all. The Fed holds a monopoly on the money supply of the US and they charge interest on the loans when the government borrows money, so the only way to pay off the interest on the loans is to borrow more money with, in turn, generates more interest which needs to be paid back, which is why the government then needs to tax the citizens. It can never be enough because there is only so much money circulating around and any one time excluding the deficit of the interest charged. So even if everyone everywhere paid off every debt to everyone that they owed to every person and every bank, there would still be an amount of interest outstanding on the initial loans that the government made in the first place. Its impossible to escape. The only way forward is to switch to a resource based economy on the principle of the intelligent management of the earth's resources and generating abundance as opposed to scarcity (which supply and demand is based on). We have the technology to achieve this, but the entire population of earth has to play fair in order for it to work.

  • Denny - 2012-04-17 15:51

    I can't say I'm surprised by the nominal impact the Buffet Rule would have on the US deficit. Buffet is a smart guy and I really expect he would've realised this too. I tend to view his suggestion in conjunction with Berkshire Hathaway companies receiving around $95 billion in TARP funds and the company itself owing taxes from 2002-2009 at the time he started weighing in on the discussion. The whole thing stinks of political posturing rather than economic sense.

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