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Wednesday, September 21, 2011

Why the "Buffett Rule" Can't Work

At first glance, President Obama's new tax on the wealthy - the so-called "Buffett Rule", in honor of Billionaire investor Warren Buffett - will appear to be a good step to bringing our sky-rocketing budget deficit under control.  This year's fight over the debt ceiling only produced $38 billion in spending cuts, so it's hard to see a way forward without some new revenue.  The wealthiest Americans, primarily those who can rightfully be called millionaires, can surely spare a little change to help the country out.

Daniel Indiviglio, puts pen to paper in the Atlantic to calculate just how much it will help us to have the rich pay their "fair share", but what he found isn't what you might expect. 

His chart (see right) shows the varying amounts of additional income that can be collected from our nation's millionaires.  The red line near the top is our current year budget deficit. 

(Invidiglio uses the actual reported incomes and makes no assumptions as to how increased rates may change behavior.  In reality, the actual amount of income reported would decrease were rates increased.)

As the chart shows, raising the baseline 29.1% to a flat 35% only brings in an additional $37 billion.  In fact, even if you confiscated 100% of the yearly income for all millionaires, we would still be a trillion dollars short of closing the deficit under Obama.  We might think that the wealthy have all the money, but they don't.  They have a lot, but there just aren't enought of them.  We must remember the top 1% is outnumbered 99-1.

Indiviglio's conclusion is this -

So this Buffett Rule is a great populist proposal if the president wants to score some political points, but it has little practical value. It might provide the government a little bit of additional revenue, but unless extremely aggressive, it wouldn't make a dent in the nation's deficit problem. To do that, you'll need to cut entitlements and/or raise taxes much more broadly.
One reason this seems contrary is because of how often it is said that the wealthy are not paying their fair share.  But in truth, not only are they paying their fair share, they're paying well above it.  The top 1% earn 19% of total income but pay 37% of all taxes. 

If that is not a fair share, then I need someone to explain to me what would be.  What share of the tax burden would one consider to be a "fair share"?

Isn't it time we stopped placing blame and pointing fingers at each other?  Instead of tearing each other down, can we just get back to finding a way to grow the economy rather than government?  After all, no one ever complains about a "fair share" when there is plenty to go around.

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