After listening to Obama’s Buffett Rule, you realize Robin Hood
had it easy. Achieving “fairness” is much easier done with bows and
arrows than rationalizing and legislating. It is simplicity itself
to take an arrow from quiver to bow, but complexity itself to take
“fairness” and legislate it into the tax code.
Speaking last week, Obama explained his Buffett Rule’s origin:
“You’ve heard that my friend Warren Buffett pays a lower tax rate
than his secretary…” In this year’s State of the Union address, he
explained the Rule’s meaning: “Tax reform should follow the Buffett
Rule. If you make more than $1 million a year, you should not pay
less than 30 percent in taxes.”
Seems simple enough…until you try to put it into the tax code.
Then questions quickly appear.
For one thing: How much do secretaries make? This is a pretty
important point because the whole concern apparently arises from
Warren Buffett paying a lower tax rate than his secretary.
According to last year’s analysis by the Bureau of Labor
Statistics, the annual mean wage for “executive secretaries and
executive assistants” — and we can presume that Buffet’s secretary
falls in that group (more on that point below) — is $48,120. Not
bad, not enough to buy a single share of Buffett’s Berkshire
Hathaway stock, but not bad.
So, we can presume from the 30 percent “fairness” standard that
this person is paying just below a 30 percent rate? According to
Congress’s official tax estimator, the Joint Committee on Taxation,
an individual making BLS’s annual mean wage for executive
secretaries pays a 10 percent income tax rate on her first $8,700,
then a 15 percent rate up to $35,350 and then 25 percent up to the
$48,120.
Those percentages are well less than the 30 percent “fairness”
threshold laid out under the Buffett Rule. What gives?
Well, perhaps Buffett’s secretary is paid a tad more than just
the mean annual wage. How much would she have to be paid to fall
just below the 30 percent “fairness” level — i.e., the 28 percent
rate bracket? Again according to Congress’ JCT, an individual
earner does not reach the 30 percent tax bracket this year until
she earns over $178,650. Wow.
That is a pretty good salary to say the least — there’s nothing
“mean” about it. You have to be pretty handy around the office to
make that kind of money. Lots of folks would like to have their
handiness so well compensated. In fact, if you’re a secretary
making less than this, you should really consider moving to Omaha.
Apparently there is a serious shortage of secretarial help in
Nebraska.
Another point is that someone making this amount does not simply
“pay less than 30 percent in taxes.” They pay a lot less. According
to the JCT, she pays an average income tax rate of 10.9 percent.
That’s right, 10.9 percent. The reason is because of the stair-step
nature of the tax code’s marginal rates (whereby income is taxed
first at lower rates) and numerous items in the tax code that
reduce the effective tax rate — the real key to taxes’ impact on
an individual.
If the focus were on the real economic impact to such below-30
percent-taxpayers, then the Buffett Rule’s quest for “fairness”
could simply accept the current capital gains top tax rate of 15
percent, which is still significantly higher than this group’s 10.9
percent average effective tax rate. Of course, that would be plenty
awkward to have to admit.
The awkwardness does not stop there though. How do you ensure
that someone “not pay less than 30 percent in taxes”? Because the
lower tax brackets reduce the overall effective rate that a person
pays, even if there were no special tax-reducing items in the tax
code, a person is going to pay less than their top
statutory rate. In other words, even if you tax everything they
make over $1 million at the 30 percent rate, they will still pay
less than a 30 percent rate on their total earnings. So do you
actually need a rate higher than 30 percent to achieve
“fairness”?
And finally ponder this: We have been here before. It’s called
the alternative minimum tax, or the AMT — and its top rate is 28
percent. Originally designed in the 1980s to achieve the “fairness”
now sought, it missed badly and instead would sweep tens of
millions of middle class taxpayers into its net. That is it would
if Congress did not “patch” the AMT every year so that the
unintended middle class are not caught by it. But even with that
fix, it apparently didn’t achieve its “fairness” goal in regards to
top earners either, or else we would not now need to look at what
would effectively be a second alternative minimum tax.
Yes, Robin Hood had it easy — no wonder his associates were
called “Merry Men.” Taking “fairness” from Sherwood Forest to the
U.S. tax code is a long and arduous trip indeed.
