The “Buffett Rule” charade

April 17, 2012

Gary Lapon explains how the tax system has been skewed in favor of the rich.

WITH TAX Day approaching and the Republican Party seemingly settled on nominating a super-rich parasite as its presidential candidate, Barack Obama gave us a taste of the coming general election campaign this month with a lot of talk about making the tax system fairer so the rich "pay their share."

Specifically, Obama and the Democrats are pushing the so-called "Buffett Rule." Named after multibillionaire speculator Warren Buffett, the Buffett Rule would set a goal of getting those earning more than $1 million a year to pay at least 30 percent of their income in federal taxes--something closer to the rate at which middle-income households pay.

But don't expect the IRS to start sticking it to the super-rich any time soon. The Buffett Rule doesn't stand a chance of becoming law before the 2012 election--not with a Republican-controlled House and GOP senators willing to block any such measure in their chamber, as they did on April 16. So this is really a campaign maneuver, not anything that's expected to become law.

Warren Buffett
Warren Buffett

Moreover, even if the Buffett Rule became law--and its fairly vague "guidelines" translated into real enforcement--the U.S. tax system would remain overwhelmingly favorable to corporations and the rich, and tilted against working people. That's no surprise, since the politicians who oversee the tax system--Republican and Democrats alike--are committed to serving the interests of the 1 percent, at our expense.

WARREN BUFFETT, one of the wealthiest people in the world with a net worth of $44 billion, has famously pointed out that he pays taxes at a much lower rate than his secretary and other employees. Buffett says he supports modest increases in taxes on the wealthy to end this disparity--or at least make it less grotesque.

The government's own statistics back up Buffett's point--even when looking just at the federal income tax, and leaving aside the range of other regressive taxes, like the sales tax, that by definition take a bigger bite out of the earnings of lower-income people than higher-income people. According to the Internal Revenue Service, in 2007, the wealthiest 400 households in the U.S. made an average of $345 million for the year and paid federal income taxes at an average rate of 16.62 percent. That's the same rate paid in 2007 by a single person earning $42,676 for the year.

So the super wealthy can make more than 8,000 times what you do and still pay the same federal income tax rate. How? One of the main reasons is that taxes on capital gains--income from investments in stocks, bonds, real estate and the like--are set at 15 percent, whereas income from wages and salaries is taxed as high as 35 percent for the highest bracket of income. Rich people make disproportionately more from capital gains than salaries, so the tax code has a huge built-in advantage for them.

The Buffett Rule to raise the overall tax rate on millionaires to 30 percent was introduced as legislation in February as the "Paying a Fair Share Act." However, everyone in Washington knew the Republicans in the Senate would block the measure when it came up for discussion--and the House Republican leaders wouldn't even let it come up.

Rather than signaling a shift toward a "fair" economic policy, as Obama has claimed in recent speeches, the proposal is best understood as a campaign move. Thus, on, the Obama campaign's website, there is a "Pass the Buffett Rule" calculator that invites users to see their tax rate in comparison to Republican frontrunner Mitt Romney--and then see what how much Romney would supposedly pay if the Buffett Rule were passed.

Romney, of course, has taken full advantage of the tax system over the years. In 2010, he reported income of $21.6 million and paid less than 14 percent in taxes. His "success" in business comes from founding Bain Capital, a financial firm that specializes in corporate buyouts, so he's always gotten most of his income from capital gains. Naturally, he firmly opposes any proposal to raise the tax rate on capital gains.

Romney is a parasite, and any tax increase on him and his ilk would be more than welcomed by the vast majority of the population.

But anyone who thinks Obama and the Democrats are serious about the Buffett Rule should remember that this is an election year, when Democrats always shift to the left rhetorically and pay lip service to the interests of working people and unions in order to win votes.

Those who would take Obama at his word that he intends to make the rich pay their fair share and use the revenues to fund jobs programs and education should remember the promises that Obama made--and broke--in 2008.

On the campaign trail in 2008, Obama pledged to pass the Employee Free Choice Act, which would make it easier for workers to join unions. Once elected, with Democrats in control of both houses of Congress, the legislation was left to die. Obama also promised to "put on comfortable shoes" and walk the picket line if workers' collective bargaining rights were under attack. Yet when public-sector workers stood up to Republican Gov. Scott Walker's attack last February in Wisconsin, Obama was nowhere to be seen.

Most relevant of all is Obama's capitulation on his promise to allow the Bush tax cuts for the wealthiest Americans to expire when they came up for renewal at the end of 2010. This was hardly a radical proposal--taxes on income over $250,000 a year would have gone up slightly, to the level during the Clinton years.

But the Democrats put off a vote on letting the tax cuts expire--until after the Republicans won a sweeping victory in the 2010 congressional elections. Obama said he would negotiate with the Republican leaders--and the "compromise" he made extended all of the Bush tax cuts for two years. The cost for maintaining lower tax rates for the top 2 percent of highest-earning Americans was around $120 billion over two years.

Even if the Buffett Rule were implemented, it would be a drop in the bucket compared to this ongoing giveaway to the super-rich.

According to Congress' Joint Committee on Taxation, the Buffett Rule would bring in around $47 billion in revenues over the next 10 years. That's about one-third of what the wealthy are saving this year and next as a result of the extention of the Bush tax cuts.

And according to some analysts, the Democrats' proposal to implement the Buffett Rule as a replacement for the Alternative Minimum Tax, which is expected to net over $1 trillion over the next decade, could reduce tax revenues overall.

To call this "fair" is laughable. It brings to mind Malcolm X's point that "you can't drive a knife into a man's back nine inches, pull it out six inches and call it progress"--although in this case, it's more like pulling it out a half an inch, if that.

ANY DISCUSSION about a fairer tax policy today ought to take into account how we got here.

Over the past several decades, income and wealth inequality has increased dramatically. The top 1 percent now own over 40 percent of the nation's wealth, and their share of national income increased from 9 percent in 1976 to 24 percent in 2007.

Meanwhile, the tax burden has shifted in exactly the opposite direction--first, from corporations onto individuals, and second, from the wealthiest individuals onto everyone else.

As left-wing economist Richard Wolff points out, in 1943, U.S. corporations paid nearly $1.50 in taxes for every $1 paid by individuals. By 1960, this amount had already fallen to just over 50 cents in corporate taxes for every $1 from individuals. But the trend continued over the following decades. By 2010, corporations were taxed about 22 cents for every dollar paid by individuals, about one-seventh the relative proportion they paid in 1943.

These figures contradict the deceptive claims of pro-business commentators who love to complain about how U.S. corporate tax rates--nominally 35 percent of income--are "the highest in the world."

In reality, the biggest corporations pay a fraction of that rate, if they pay any taxes at all. In a joint report, Citizens for Tax Justice and the Institute on Taxation and Economic Policy examined the tax records of 280 profitable Fortune 500 companies from 2008 to 2010. The average tax rate for all of these corporations was 18.5 percent, and 30 profitable corporations paid no taxes at all over the three-year period--they actually received a refund. A total of 78 companies paid no taxes during at least one of the three years.

There's an old saying that "nothing is certain except death and taxes"--but that applies to everyone except major U.S. corporations, which are saved from death by insolvency with taxpayer-funded bailouts and freed from the burden of paying taxes despite massive profits.

For example, General Electric, whose CEO Jeffrey Immelt was chosen by Obama to chair the Council on Jobs and Competitiveness, made $10.5 billion in profits from 2008 to 2010, yet reaped $4.7 billion in tax benefits, for a tax rate of -47.8 percent. Verizon, whose workers went on strike last year after the company demanded cuts in wages, health and retirement benefits, made more than $32 billion over the same three-year period, and received tax benefits of nearly $1 billion.

IN ADDITION to the tax burden shift from corporations to individuals, wealthy individuals are paying relatively less, and middle-income and lower-income individuals more.

Long before the Bush tax cuts, tax rates for the wealthiest U.S. households had already declined dramatically. According to a report by Wealth for the Common Good, "Over the last half-century, America's wealthiest taxpayers have seen their tax outlays, as a share of income, drop by as much as two-thirds. During the same period, the tax outlay for middle-class Americans has not decreased."

As recently as the early 1960s, the tax rate on income at the highest levels--known in tax terminology as the top income bracket--exceeded 90 percent. By the end of Ronald Reagan's eight years in the White House in the 1980s, the rate had dropped below 30 percent. George H.W. Bush increased the top tax rate to 31 percent, and Clinton hiked it to 39.6 percent. The Bush tax cuts reduced the rate to 35 percent, where they remain today.

Meanwhile, the tax rate on capital gains, which was raised in the late 1960s and mid-1970s to a maximum of close to 40 percent, has been cut over the past few decades to the current rate of 15 percent. These reductions have almost exclusively benefited the top 1 percent. According to Citizens for Tax Justice, were the capital gains tax rate restored to its high point, 80 percent of the tax increase would be borne by the richest 1 percent of taxpayers, and 90 percent by the richest 5 percent.

Right-wing commentators often seek to confuse the tax issue by pointing to the fact that only half of U.S. residents paid federal income taxes in 2009. Low-income households who don't make enough money to pay the federal income tax are viewed as "freeloaders."

This turns reality on its head. The real "freeloaders" are the giant corporations raking in record profits while paying little to nothing--or less than nothing--in taxes, and the banks who receive giant government bailouts and then pay billions in bonuses to executives while throwing working people out of their homes.

In reality, as the Center on Budget and Policy Priorities (CBPP) points out, the statistic about 2009 is misleading because that was the low point of the recession and a number of temporary tax breaks were in place. Two years earlier, 40 percent of households didn't owe federal taxes.

More importantly, the right-wing complaints about income tax freeloaders on the bottom of the income ladder conveniently ignores the many other taxes, most of them highly regressive, that working people do pay--like the federal payroll tax that funds Social Security and Medicare, and state and local sales taxes.

According to the CBPP, "When all federal, state and local taxes are taken into account, the bottom fifth of households pays about 16 percent of their incomes in taxes, on average" (emphasis in original)--a major burden on households on the lower end of the income ladder, and still higher than Mitt Romney paid on his income taxes.

The Buffett Rule wouldn't even come close to making the rich "pay a fair share." For that to happen would require a fundamental overhaul of a tax code that is currently designed to benefit the wealthy at the expense of those who produce the wealth.

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