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Frustration Over The Buffett Rule and Taxes

September 18, 2011 · 32 comments

in Personal Finance

So Barack Obama is going to propose yet another initiative to try to reduce the deficit called ‘The Buffett Rule’.

In short, Americans that make more than a million dollars a year will be forced to pay taxes at a rate at least what the middle class pays. Billionaire Warren Buffett is involved because he claims he effectively paid only 17 percent in taxes last year, which was a lower rate than anyone else who works in his office paid.  It is implied his tax rate was lower because investment income/capital gains are taxed at a lower rate than income.   (Attacking investment income sound like a great way to stimulate the economy, doesn’t it?)

So, lets base new initiatives on the net results of one of the richest people in the world who is nowhere near representative of even those considered wealthy in America, OK?

The fact of the matter is, our Federal Tax Code is so screwed up and these initiatives aren’t going to fix things.   As long as our tax code stays as it is, new loopholes will just be created to get around any new initiatives that are enacted.   Then, in a couple years, we will pull out another high-profile financial person and name a rule after them to close the new loopholes.

I have an idea.  Lets start from scratch and go with a tax system that is as basic as possible so that there are no loopholes and it is just straight math.   When I file my Michigan taxes, I just have a straight 4.6 percent rate and that is it.  Why can’t Federal taxes be figured similarly?  Obviously there would have to be some consideration for those at the lowest income levels, but other than that, I am sure we would recoup a lot of money if those who have avoided taxes actually did pay.

It is interesting because the proposed budget for the IRS for 2012 is $13.3 billion, which is a $1.1 billion increase over 2010.  However, the IRS feels they will more than recoup the additional cost because of all the tax cheats they will be able to catch.  That may be true. What I would like to see instead of the Buffett Rule though is a different plan where some tax guru is dragged out onstage that will help the government totally revamp the tax system so that people contribute what they should based on very basic tax rules.   Sure, that may have some short term costs in terms of plan development and I am sorry there will be a loss of some IRS jobs.  However, all sectors of the economy have suffered job loss, and the country has to get creative to figure a way out of this deficit mess it is in.   Making a ridiculous tax code even more convoluted is not going to put this country back to prosperous times.  Instead, we need long-term, strategic thinking that just may ruffle a few feathers.

In synopsis, instead of increasing taxes and possibly discouraging investment, how about ‘enforcing’ taxes?

What do you think of the Buffett Rule?

 

 

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{ 28 comments… read them below or add one }

krantcents September 18, 2011 at 12:16 pm

Although I would welcome a flat tax, I do not trust our politicians to create something that is any better. They succumb to influence of the rich or other vested interests that seems to make something different from the ideal outcome. There was a change in the 80s that created AMT (alternative minimum tax). There is a windfall penalty for people who earned Social Security and a pension. Changes to the tax code always seems to result differently than intended.

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Kris September 18, 2011 at 12:38 pm

I don’t trust the government either, which is why I hate cutting the deficit through raising taxes. I disagree with so many ways in which the government spends our money that I don’t like giving them even more money to allocate (per person). Now, enforcing the tax system so that people do pay what they should and creating a larger pool of money is one thing. However, making certain pay more and more and more at the risk of reducing investment doesn’t work for me.

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kh September 18, 2011 at 4:07 pm

I personally am in favor of sunsetting the IRS and our current tax code and starting completely fresh with a new code that contains far fewer loopholes and exemptions, a new set of tax laws, and a new organization designed to collect them.

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The Biz of Life September 18, 2011 at 8:41 pm

I would like to see the income tax abolished by constitutional amendment, and a national sales taxes replace it. That way we could stop all this class warfare nonsense.

As for Mr. Buffett– this a classic case of do as I say, not as I do.

Berkshire Hathaway is currently in a dispute with the IRS about underpaying taxes since 2002. Instead of gladly writing a check, Warren is fighting it all the way.

Warren constantly complains about being undertaxed. To correct this situation he could make a gift to the IRS each year at:
Gifts to the United States
U.S. Department of the Treasury,
Credit Accounting Branch
3700 East-West Highway, Room 622D
Hyattsville, MD 20782
http://www.fms.treas.gov/faq/moretopics_gifts.html

But he elects not to do this.

Instead of giving his billions to the Bill and Melinda Gates Foundation, he could give his entire fortune to the US Government. But he won’t do this. Why? Because deep down he knows more good can be done with his money by private than the federal government, which will just fritter his wealth away.

His actions show that he is a rational thinker, while his words show that he is just a third rate political tool.

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Jon - Free Money Wisdom September 18, 2011 at 9:56 pm

I am with KrantCents—I don’t think the government is going to improve anything. They never do. We’ll see how this pans out.

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101 Centavos September 19, 2011 at 7:53 am

I’m more of a wild-eyed radical when it comes to personal income or VAT taxes. I’d have neither, and just send the Federal government on a diet with a flat 4% tariff on imports. But that’s utopian thinking. None is likely to happen, whether it’s simplification of the tax code, or a constitutional amendment for repeal of the income tax, without massive disruptive change with a capital “C”.

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The Biz of Life September 19, 2011 at 9:48 am

Sounds like you want to turn the clock back on government to the late 1700’s, early 1800’s. ;0)

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101 Centavos September 19, 2011 at 7:58 pm

Only if wishing upon a star…

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Denise @ The Single Saver September 19, 2011 at 2:24 pm

I am, frankly, tired of the mentality that the rich somehow owe it to the rest of us to pay more. I am a big fan of a flat tax, which incentives for charitable contributions. Everyone pays a fair share of their earnings, rather they be large or small.

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Kris September 20, 2011 at 1:46 pm

Let’s revolutionize the country Denise. I don’t know what is so hard about everyone just paying a certain percent of income. How it got to where it is, I have no idea.

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Julie @ The Family CEO September 20, 2011 at 2:10 pm

I’m with you guys on this! I would even exempt working families at or below the poverty level.

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Jacq September 19, 2011 at 4:02 pm

I’ll stay out of this (cuz I’m Canadian) but here’s an interesting post from Daily Speculations called “Why Buffett’s Tax Proposal is Self-Serving”:

http://www.dailyspeculations.com/wordpress/?p=6784

I’m not a fan of deductions/different tax structure for either dividends (although I receive them) or charitable contributions (although I make them). Or deductions for children for that matter (although I have them).

Also, and maybe this is relevant – I’ve done taxes (professionally) for years in Canada. When I moved to the US years ago for a couple of years, your income tax forms were totally mind-boggling to me and I didn’t even trust myself to prepare my own return. Scary stuff. Not to mention that the IRS denied my children’s existence for tax purposes – when the govt themselves were the ones to give me a residency permit for them? Holy inefficiency Batman.

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Kris September 20, 2011 at 1:45 pm

I would love to see a post Jacq detailing your thoughts on our tax system! I would be fascinated to read a perspective from someone that doesn’t have an agenda behind their views.

What’s a tax deduction? Many of us don’t even qualify for most of them.

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Aaron Hung @ aaronhung.com September 19, 2011 at 6:55 pm

one day…there will be an honest politician, one day

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Kris September 20, 2011 at 1:43 pm

Aaron, let me know when that happens, ok? I might not know it when I see it.

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Julie @ The Family CEO September 20, 2011 at 2:12 pm

Chris Christie, Governor of NJ. He’s the straightest shooter I’ve ever seen.

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retirebyforty September 19, 2011 at 7:07 pm

I would like flat tax as well, but I don’t mind increasing the tax on people who make over a million dollars either.

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Kris September 20, 2011 at 1:43 pm

RB40, so just curious, how much is enough when taxing those that make over a million? I just don’t understand why people that work hard and are successful should have to keep giving and giving when there are so many people (middle class included) who essentially don’t pay any tax at all. If the tax code wasn’t so darn ridiculous and allowing people to have endless breaks and get away with so much, then the ‘rich’ wouldn’t have to be strung up and forced to pay for everything.

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Kevin@RothIRA September 19, 2011 at 8:04 pm

I think we all better hold on to our wallets! Tax the rich schemes always sound good in theory, but since there are far fewer rich people than worker bees–by a wide margin–we can and should expect that ANY new taxes will be broadened to take in more tax payers.

Also, taxes are always based on income, not on assets, and with all the loopholes in the tax code it’s easy for a person who’s worth millions to look like a middle class income earner. By contrast, a person who’s truly middle class by wealth might have a higher income and be subject to higher taxes than the millionaire.

It makes a strong case to plow as much money as we can into the last remaining middle class tax loophole–retirement plans.

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Kris September 20, 2011 at 1:40 pm

Oh totally. Sock away as much as you can into a retirement plan! Of course, I wonder how long it will be until the government gets a hold of those too? Maybe if you have a million in your 401 k plan you will be considered a millionaire too.

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First Gen American September 23, 2011 at 10:10 am

I’d love a flat tax. I hate loopholes. I remember when I was in college, one of the guys I went to school with got almost as much financial aid as I did. His parents had 2 homes, jet skis and all kinds of toys. They lived paycheck to paycheck because of their lifestyle, but it seemed strange that someone who made $60K/year got the same aid as a person who was debt free and made $15K/year. Same goes for tax rates.

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Kris September 23, 2011 at 11:34 pm

Oh, don’t those stories drive you crazy? There was definitely something wrong with the formula if the two of you got the same amount of aid.

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Amrinder Arora September 23, 2011 at 3:09 pm

I prefer to pay higher taxes so that the roads in my neighborhood, the libraries and the public schools keep functioning. Everyone can choose to be greedy and try to save 2 cents on the dollar, but where does that lead us as a nation? Our cities and communities need that hard cash for actual services we use – roads, libraries, emergency services.

What next? Secede from the union and live on an island?

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Kris September 23, 2011 at 3:26 pm

I prefer for just about everyone to pay something in taxes, but unfortunately, that does happen because our tax code is so screwed up. If there weren’t so many breaks and loopholes, a greater percentage of the population would actually pay taxes (I am not talking the poor, but the middle class) and we wouldn’t be having this conversation. It isn’t that people don’t want to have public schools and libraries. It is more that the government is not a wise spender of money (in my opinion) and we could keep giving and giving and the schools would still be a mess. It is about a lot more than giving two more percent in tax money.

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Julie @ The Family CEO September 23, 2011 at 5:56 pm

Well, libraries and school taxes aren’t federal, so I’m not sure what they’re doing in this discussion. And I’m fine with the federal government taxing for roads and infrastructure. National defense and border protection too. I’m even for providing a social safety net for the the poorest and most vulnerable among us. Unfortunately what we have now has far surpassed that. If that opinion makes me greedy, so be it.

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Kris September 23, 2011 at 11:31 pm

I couldn’t agree more Julie- perhaps we are both greedy then…

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Invest It Wisely September 24, 2011 at 2:08 pm

I don’t know about Buffett. He is clearly a great investor, perhaps one of the best that we’ve ever seen, but he is too close to the government to take his words at face value anymore. Besides, he can always voluntarily give the IRS more money if he believes what he says.

As for enforcing taxes, how about this. Disband ALL legal monopolies that currently exist in the country, including those that give power to companies to shut down competition, those that give power to unions to compel employers to reject other employees, and those that force people to subsidize special interests through taxation.

Then, let people choose. If they want to pay taxes to support the government-run enterprise, then let them. If they want to keep their taxes to support another enterprise because that enterprise does a better job of serving the consumer, then let them. What a novel idea: letting people choose.

At a minimum, you can retain taxes for essential defense and the preservation of law, as well as minimum welfare to prevent people starving IF private charity is truly not up to the task even if people are able to retain choice over a much larger proportion of the fruits of their labour, but NOT for social engineering. You surely won’t require a huge army of bureaucrats to enforce such a minimal taxation scheme whose only goal is to prevent miscreants from disrupting the voluntary social order.

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Kris September 27, 2011 at 3:39 pm

Kevin, I would love to streamline the government like you suggested. Unfortunately, people here seem to have gotten even more dependent on the government through housing bailouts, stimulus spending, and more. I don’t know how we are going to get out of this mess. Too bad you are Canadian and can’t run for ofice here.

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