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What's wrong with the 'Buffett rule'

More tax code fairness is good, but it won't solve all the problems of the US economy. The reality is that everyone needs to pay higher taxes, plus undergo an attitude shift.

By MSN Money Partner Apr 11, 2012 2:05PM

This post is from Rick Newman at U.S. News & World Report.

 

http://www.usnews.com/moneyMany Americans feel dispossessed. Data support their grievances: Incomes are stagnant, joblessness is high, and more people really are falling behind.

 

President Barack Obama thinks he has a solution: a new "fairness" agenda that starts with the "Buffett Rule," a proposal to raise tax rates on millionaires to the same levels middle-class earners typically pay. This would be followed by other measures meant to assure that "everyone gets a fair shot and everyone does their fair share," as Obama has said repeatedly.

 

The U.S. tax code is certainly a mess that favors those able to move their money around and hire experts to take maximum advantage of loopholes. The Buffett Rule is actually sensible, because it would plug some of the holes that special interests have drilled into the tax code over the past 50 years. But it also seems like the wrong place to start trying to revive America's fortunes, for at least two reasons.

 

The first problem is that the Buffett Rule and Obama's whole fairness doctrine perpetuate the fiction that Washington can solve the overarching problem of fading prosperity. This might have been plausible 50 years ago, when the U.S. economy was far more self-contained and growing at a heady pace that made lavish government spending possible. (Post continues after video.)

These days, however, the federal government is heading toward insolvency, and many aspects of the global economy are beyond Washington's control. The enormity of the national debt, which now tops $15 trillion, makes it a mathematical certainty that Washington is going to do less for citizens and ask them to contribute more. If politicians were honest, they'd prepare voters for the sacrifices that lie ahead, instead of promising 99% of them that everything will be fine as long as the other 1% pays more.

 

The Buffett Rule would impose a minimum effective tax rate of 30% on people who earn more than $1 million per year, raising the average tax rate for that group by a few percentage points. But even the White House acknowledges that the amount of extra revenue raised would be trivial compared with the size of the debt.

 

Obama suggests that higher taxes on the wealthy will reduce the need to raise taxes on the middle class. But nearly every budget expert will tell you that the only way to get the debt under control is to raise taxes on virtually everybody, or eviscerate government services.

 

The second problem is that Obama is still not telling struggling Americans what it will really take to revive their own fortunes and, to some extent, the nation's: more grit, more self-sufficiency, a more entrepreneurial spirit and greater engagement with the world beyond U.S. shores.

 

There are many Americans who have what it takes to succeed in the hypercompetitive global economy. Others are getting the right skills and going where the best opportunities are -- which sometimes means overseas.

 

But too many Americans are stuck in place, waiting for jobs that are never coming back or hoping the government will intervene and fix things. The odds are very high that it won't. The government lacks the money and know-how to reboot most parts of the economy. Plus, ongoing paralysis in Washington makes the government the least effective cog in the whole American system.

 

This is not to say that free-market incentives and more competition are the answer, as many conservatives insist. All the bailouts, corporate meltdowns and economic disasters of the past decade have made it clear that capitalism generates turbulent waters, not the gentle rising tide that capitalist romantics believe in. It raises some boats, swamps others and threatens a tsunami every now and then.

 

We need nimble government that enforces some healthy rules, but we also need robust citizens who take smart risks, bounce back from setbacks and rarely think of government as part of their strategy to get ahead. Warren Buffett, the man, is an exemplar of such drive. The rule named after him isn't.

 

More from U.S. News & World Report and MSN Money:

 

 

VIDEO ON MSN MONEY

177Comments
Apr 11, 2012 7:59PM
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You say "We need more nimble government" at the end, after you say "The reality is that everyone needs to pay higher taxes" in the headline.

This article is either dishonest or incompetent "journalism".

Higher tax collections have never been used to reduce the deficit, only to enable even higher spending therefore creating even larger deficits.

Higher tax rates only decrease government collections.  Lower tax rates increase government collections.  EVERY TIME.

"Government Services" is an oxymoron.  Increased spending hasn't increased services, it has only transferred money from the people who work for a living to the people who vote for a living:  the politically favored class.

Half the people pay no taxes.  There's the part that's unfair.

Apr 11, 2012 7:56PM
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Republicans should all abstain when the bill come up and let the dem have the buffay rule
Apr 11, 2012 7:35PM
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If corporations are people, then why do they not pay the same tax rates as people do? That is one of the places people like to hide money. How much $ do most large corporations have just sitting in the bank?

Apr 11, 2012 7:26PM
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Who has had the money to be able to lobby and to be able to corrupt our politicians? Why it could not be the people with all the money now could it? Maybe if you would stop fing around with our government it would not WASTE so much. Instead, it is a tug or war match between those with the most cash to see who gets the best breaks, while the rest of us are left to fend for ourselves.

 

Then you come on here and CRY about how 50% of Americans do not pay taxes. B.S. the 50% you are talking about make under 33k a year and PAY 2.9% of the total tax. That might not seem like much compared to the top bracket that makes over 440k a year and pays 40% of the total tax. What happens when we multiply 33k by 14 and 2.9% by 14? We would get 462k a year and 40.6% of the total tax, wow imagine that the TAX RATES ARE THE SAME for both brackets. WTF ARE YOU CRYING ABOUT AGAIN? The issue is not the rate that the lower bracket is taxed at it is that they earn more then 14 times less. And due to investments the tax rates for the top bracket can be LESS, like Mitt and Buffett.

 

Please continue to argue with me about math, it makes it easier to prove you wrong and show that you are ignorant or just full of chit. And yes everyone needs to pay more, an exponential increase near the top is needed to make an effective soft cap of 10 to 1 earnings ratios. At that point the tax rate should be near 100% past 10 to 1. The idea is to limit greed without needing 10 million laws, police, guns, etc. to enforce it all. Since you cannot keep it, would be forced to pay it, you might just do something GOOD with it instead.

Apr 11, 2012 7:23PM
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At last, an honest article!  Spot on, either EVERYBODY will pay a load more taxes or government will be gutted.
Apr 11, 2012 7:22PM
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Frankly, I want to know what the author's (Rick Newman) background is in terms of education and experience?  As an "Editor/Producer" for U.S. News & World Report, what gives HIM credibility to write on this topic?  What are the research sources used to come up with such ideas?  Why should I believe what he purports throughout this article?  I have my own OPINION on the topic, but it is just that -- an opinion.  I wish the media would actually publish meaningful articles that provide credible citations for where the author acquires his/her data from.  You really cannot read ANYTHING anymore from a media outlet without doing your own research to validate or invalidate the sludge we are inundated with daily.
Apr 11, 2012 7:22PM
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thisplanet

I like that you are thinking of solutions but I wanted to let you know why your second idea wont work (extending home loans to 100 years). Doubling a loan length does not cut the payment in half but rather only cuts it by a small amount. On a 200,000 loan at 6% for 30 year payments would be 1199, at 60 years payments would be 1028 and at 100 years payments would be 1002. The only part of the loan payment you reduce is the principal payment, So you don't build much equity.  The other part of the problem is that people typically shop for homes based on what they monthly payment will be so the cost of homes will rise and the payments will still be the same.


Apr 11, 2012 7:17PM
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The Republicans won't tax the rich who need to be taxed won't even MORE than 30%.  Obama wants to add entitlement programs instead of reducing them.  The Republicans won't touch the new massive anti terrorism bureaucracy and neither will Obama.  The Repubilicans won't reduce the military budget, Obama won't reduce it enough.  No one has proposed an across the board cut in Federal worker salaries INCLUDING CONGRESS.  State and local  government workers have been impacted by the recession but not the Feds.

The State of Alabama has a system called proration.  ALL agencies must cut their budgets or may raise their budgets according to the revenue available.  The budget must be balanced by state law every year.  The Federal government could  go on proration.  We don't need a constitional amendment, we just need to do it.

 

Apr 11, 2012 7:13PM
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Once again the mainstream media misses the biggest lie of all.  The Obama Administration is proposing to increase the INCOME TAX on the wealthy.  This will do nothing.  The "wealthy" do not have what is considered "income" (from wages) they live off of the return on their investments.  Raise the Income Tax on the top 1% to 100% and you might get $1 from one of them.  So all of this is great political posturing and rhetoric but has no effect on anyone or anything.
Apr 11, 2012 7:00PM
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Tarzan646, that's quite a big ax you have there. Not sure why you want to grind it here.
 Limit the number of lawyers through licensing. like the government does for taxi drivers
Already done. 
Cap lawyer's and law firms income. 
Cap? Like how? Tell them to stop accepting money from clients? 
Require lawyers to maintain expensive malpractice insurance like doctors are required to. 
Already done.
Fine all lawyers that bring frivolous lawsuits. 
Already happens, although very few lawsuits meet the frivolous criteria. 
If a lawyer loses his case, he can't charge his client. 
Already done.  It's called a contingency fee arrangement.
Unscrupulous lawyers are destroying the US.
 Not sure what evidence you have of this.  Did you recently end up on the wrong side of a divorce settlement?
 "Have you been in a wreck, have you been turned down for government disability checks, call - blah - blah Law Firm".
Plaitiff's lawyer advertising can be seedy, but it's heavily regulated and for a legitimate service. Much worse is advertising for tax help scams, invention help scams, work at home scams, real estate investing scams, etc.
Then lawyers graduate to become politicians, where they go into the government and make more laws for more lawyers to make more money, including themselves when they retire. What kind of "adversarial" system do we have, when both sides lawyer hang out together at the country club?
Woah there - put away the tin foil hat! If you see a conspiracy in everything, there is no need for you to take responsibility for the consequences of your actions, right?
Apr 11, 2012 6:58PM
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Obama tell the truth?! Haw; you've got to be kidding. Everything he does is for the betterment of himself; in this case, his re-election! The Buffet Rule is an absolute joke in the face of national bankruptcy. We need a leader to forge this country ahead, not an egoist seeking self-interest or a politician looking to buy votes! Be forewarned, his next move will be to offer back-door amnesty to illegals.  
Apr 11, 2012 6:57PM
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I think that it's a start...... next we get rid of all programs for the congress and senate.
Apr 11, 2012 6:56PM
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I have only one problem with the so called FAIRNESS of the Buffet Rule... what is even the slightest bit FAIR about it?
Apr 11, 2012 6:51PM
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thisplanet,

I don't know about the first idea, but I abhor the second idea. Please look at Japans economy for the last 20 years. People thought it would become the greatest economy in the 90's, passing that of the US. It's become nearly stagnant though because of the practices you suggest. 

How about I take a $20,000 loan from you and extend the term to 50 years. That doesn't do you any good because you can't do anything with that money or the low payments I'm giving over those 50 years. Instead of you using that $20,000 to start up your new business, you've lent it to me with terrible terms. You're exchanging future growth for present negative growth and end up with a long time of stagnant growth.

Banks need that money to lend and businesses need those loans to grow.  We can't just stick that money in a house for 100-150 years because we don't want the pain for a few years. Classical economics shows that a hard landing will propel quick growth...we're trying to prevent the hard landing with mixed results so far.
Apr 11, 2012 6:29PM
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I have been proposing two ideas to my elected representatives and of course I get form letters in response. So here are 2 ideas that I think will directly improve our economy AND reduce the cost of healthcare overnight.

1. Pass a law that ALL punitive damages awarded in Lawsuits are paid to the State government and not to the defendant. Why should anyone get $100M (often of taxpayers money) as punishment for an offender of any kind? Give the defendant a just award that compensates them for actual damages, pain and suffering but have the punitive aspect of the award paid to the state. This will reduce frivolous lawsuits overnight and reduce professional indemnity insurance on caregivers and drug companies hence lowering the costs that they pass on to us.

2. Allow people to stay in their homes instead of being foreclosed by extending the term of their loan to 100 years or even 150 years. Japan has long since had this system and it will keep the monthly loan payment in the realm of affordability. The banks lose nothing as they simply hold the loan on their books longer but do not have to write it down. Less foreclosures, less plummeting property values, less homes on the market. Everyone still get to pass the equity they have built in their home on to their dependants. We are all winners.

Why isn't Obama coming up with these kinds of ideas?

Apr 11, 2012 6:27PM
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I have not read or heard any compelling arguments justifying the excessive federal government spending.  The Federal Government has a speding problem not a revenue problem.  Taking the 100% of the wealth from the top 1% wouldn't even fund the governement for a year.

 

The solution is simple, "eviscerate government services" to reduce debt.

Apr 11, 2012 6:16PM
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What we need is a one-page law saying that people have to pay taxes on all their income according to a progressive scale. It needn't be terribly high, but everybody has to pay taxes on every penny of income--no writeoffs for anything. No breaks for oil companies or farmers, no capital gains nonsense, nothing. Just give people a pass on the first $5,000 or so of income so they won't starve. Then start taxing them on a scale that requires the poor to pay practically nothing, the middle class to pay middling amounts, and the rich to pay richer amounts.

 

A one-page tax law should right the ship of state soon enough.

Apr 11, 2012 6:16PM
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Typical Obama showmanship. He is grandstanding knowing that the majority of his supporters will never look at the facts. They present Buffett as a "typical" millionaire and use the term "secretary" because they know it will invoke an image of a poor singe Mom barely getting along.

The FACTS are that Buffett only pays himself $100K per year in ordinary income and his "secretary" is paid $400K per year.

Now show me any other example of a CEO of that size of company making $100K per year and his secretary making $400K per year and I will support Buffett AND Obama.

The reality is that if Buffett paid himself as an average CEO and his secretary was paid as an average secretary it would be immediately apparent that he would pay "His Fair Share" with the existing tax code.

Please open your minds and think about this false presentation when you listen to the rest of Obama's pitches.

Apr 11, 2012 6:15PM
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Rather than focus on 'fairness' (besides, who is the arbitor of fair?), let's focus on what will revive our country and give us the best chance to recover from our economic tsunami.  Scrap the existing tax system.  Flat tax everyone (currently 49%+ don't pay any tax).  This would cause our economy to grow.  With growth will come more jobs, prosperity and even tax revenue to the government. 

 

Start incentivizing government employees to cut spending in their own departments.  Have them set up a waste hot line to report fraud and abuse within the government.  This would be like the hot line with the IRS when citizens rat other citizens and get a cash reward for doing so.  These are simple ideas that would concentrate on growth and prosperity not one person's opinion of 'fairness'.

Apr 11, 2012 6:07PM
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You can take 75% of the wealth from the same group and still not make a dent in these deficits or the debt until the "gubmint" CUTS spending. Make all federal departments, all of them, CUT 3% from their 2008 spending levels. Anyone familiar with government knows that state and local governments have had to do this many times and guess what....they have survived and provided basic services. And while we are at it, make the bottom 50% of wage earners actually pay a little tax rather than "0" income taxes. This might just help a little.
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