Barrack Obama has been spending a lot of his time pushing for the passage of what he calls “The Buffett Rule” This would be a change to the tax code that would apply a 30% tax rate on all income of someone making a million dollars or more. It stems from a comment from billionaire Warren Buffett, who lamented that he pays an effective tax rate lower than his secretary.
What it really is; is populism and an election year tactic to find a boogey man to rally people behind the president. First, let’s define a few terms:
Populism, as defined by PublicEye.org is a rhetorical style that seeks to mobilize “the people” as a social or political force. And because it is rhetorical it is filled with half-truths and in this case out right lies
Tax Rate, the percentage at which a person or entity is taxed on the next dollar earned. For example; If Warren Buffett is taxed at a 39% rate on a 2 million dollar salary his tax would be something like $780,000.
Effective Tax Rate; The amount of money collected in taxes from an individual or entity; divided by his total income.
Two quick points on that last sentence concerning WB’s $780,000 tax. Warren Buffett is taxed at 39% (the highest income tax rate) on his salary. Second the US has a graduated tax system, so the first $15,000 is taxed at one rate; the next $15,000 (or whatever it is) is taxed at a higher rate until you get to the top 39% rate. So Buffett’s hypothetical federal income tax is less than $780,000. But, we will use that number to make the math easy.
When (if) Barrack Obama, his sycophants, and Warren Buffet make the statement that WB pays an effective tax rate that is less than his secretary that is true. But, it is misleading. He pays an effective tax rate that is lower for two very good reasons. First WB likely gets most of his income not from salary (taxed at 39%), but from dividends and capital gains. Both of those are taxed at a 15% rate, no matter how much of them you make. How can that 15% rate be fair you ask? Because that money has already been taxed.
Dividends are premiums paid out as a bonus to stock holders from profits made. Profits are what are left over after all expenses and taxes are paid. Capital Gains are the money you make when you sell something that you bought low (using your after-tax income) and sold high. The investor, WB, in this case put his after-tax money at risk, hoping he would make a profit. When he does the government only takes 15% of his money. If he had taken a loss, he could only deduct $3000 per year from his income.
A case could be made that the tax rate on Dividends and Capital Gains should be zero, because that money has already had a bite taken out of it by Uncle Sam.
The second reason WB pays a lower rate is from the way payroll taxes are collected. Payroll taxes are Social Security, Medicare, and such that are deducted from your salary.
What it really is; is populism and an election year tactic to find a boogey man to rally people behind the president. First, let’s define a few terms:
Populism, as defined by PublicEye.org is a rhetorical style that seeks to mobilize “the people” as a social or political force. And because it is rhetorical it is filled with half-truths and in this case out right lies
Tax Rate, the percentage at which a person or entity is taxed on the next dollar earned. For example; If Warren Buffett is taxed at a 39% rate on a 2 million dollar salary his tax would be something like $780,000.
Effective Tax Rate; The amount of money collected in taxes from an individual or entity; divided by his total income.
Two quick points on that last sentence concerning WB’s $780,000 tax. Warren Buffett is taxed at 39% (the highest income tax rate) on his salary. Second the US has a graduated tax system, so the first $15,000 is taxed at one rate; the next $15,000 (or whatever it is) is taxed at a higher rate until you get to the top 39% rate. So Buffett’s hypothetical federal income tax is less than $780,000. But, we will use that number to make the math easy.
When (if) Barrack Obama, his sycophants, and Warren Buffet make the statement that WB pays an effective tax rate that is less than his secretary that is true. But, it is misleading. He pays an effective tax rate that is lower for two very good reasons. First WB likely gets most of his income not from salary (taxed at 39%), but from dividends and capital gains. Both of those are taxed at a 15% rate, no matter how much of them you make. How can that 15% rate be fair you ask? Because that money has already been taxed.
Dividends are premiums paid out as a bonus to stock holders from profits made. Profits are what are left over after all expenses and taxes are paid. Capital Gains are the money you make when you sell something that you bought low (using your after-tax income) and sold high. The investor, WB, in this case put his after-tax money at risk, hoping he would make a profit. When he does the government only takes 15% of his money. If he had taken a loss, he could only deduct $3000 per year from his income.
A case could be made that the tax rate on Dividends and Capital Gains should be zero, because that money has already had a bite taken out of it by Uncle Sam.
The second reason WB pays a lower rate is from the way payroll taxes are collected. Payroll taxes are Social Security, Medicare, and such that are deducted from your salary.
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