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.
making $100,000 would pay that $10K max. His secretary makes $30,000 and she pays 10% or $3000. Now, let’s say this secretary works for WB who has a $200,000 salary. The payroll taxes are capped at $10K. That 10K tax taken from 200K is only 5%, instead of 10%
Why are payroll taxes capped? Because the benefits are also capped. Social Security is not a welfare program. It is supposed to be an insurance policy where you pay premiums and get a defined benefit if you live long enough. It’s the same as buying a life insurance policy. A million dollar policy would cost more than the $100K policy. But, SS doesn’t let you buy the hypothetical million dollar policy. The top policy pays only $2162 per month, if you paid in the maximum and retire at age 66. You can’t pay in more to get $3000 or $10000 per month. SS was meant to help average people, not those who have enough to not worry about retirement. So it would be unfair to keep taking more money from a person making a high income, because he wouldn’t get any
increase in his benefit.
Add those two things together and you get a smaller EFFECTIVE TAX RATE for WB, even though he will pay much more in actual tax dollars.
You will notice it has now taken me about 800 words to explain why the following 32 word statement directly from Obama’s 2012 State of the Union is an out right lie.
“Now, you can call this class warfare all you want. But asking a billionaire to pay at least
as much as his secretary in taxes? Most Americans would call that common sense.”
WB pays much more in takes than his secretary, and the president knows this. WB might pay a lower effective tax rate. There is a big difference. The president knows this, too. So why does
he lie to us?
Because it is meant to give the uninformed someone to hate. Vote for Barrack. He will make the evil rich pay their fair share.
Only hard core Democrats, the truly stupid (they are not mutually exclusive), or the uninformed, believe that the rich don’t already pay their “fair share”, The top 1%, defined as those who make above $344,000 pay nearly 37% of all income taxes. Did you get that? 1% pays 37%. You want fair? The bottom 50%; those who make below $32,000, they pay 2 ½%.
Can you do the political calculus? One man. One vote. Convince the bottom 50% and as many of the other 49% that they are paying more in taxes than the rich 1%. Then tell them that if
you only re-elect Obama, and he will make things all better.
That is the definition of populism.
Next blog I will explain why the Buffett Rule won’t do any good any way. It will actually do harm