Monday, October 3, 2011

Fair Share Taxation ... Broad Based, Simple and Progressive

Mr. Buffett's Tax Secrets challenges Buffett's and President Obama's assertions that the tax rate for Buffett's secretary is higher than that paid by Buffett himself.

Here's what the editorial says in pertinent part:

"As data from the Internal Revenue Service make clear, the vast majority of those earning more than $1 million per year typically pay tax rates two to three times higher than people making less than $100,000. In 2008, the average tax rate for millionaires and above was 23.3% and for those earning between $30,000 and $50,000 it was 7.2%."

Thus, it's clear that secretaries typically do not pay more income taxes in percentage terms than high earners pay. In fact, they typically pay less than one third as much. Buffett's secretarial taxation fairness story simply doesn't make sense. Nor, therefore, does Obama's concurrence therewith.

That said, today's story isn't going to be about Buffett's disingenuousness relative to his income taxes paid compared to those paid by his secretary.

Instead, we'll try to expose the plain and ugly nature of the unnecessarily complex and arbitrary tax system itself. Suffice it to say that the system as a whole makes no sense. It is in serious need of a complete overhaul.

So if Obama and Buffett are interested in correcting the situation, why don't they take it upon themselves to propose what in their opinion would be a comprehensive and fair approach to taxation in America today? Including entitlements and their funding. My guess is we won't be hearing from them anytime soon on this.

With respect to taxation, fairness is, as always, in the eyes of the beholder. I have no recommendation about what Buffett should pay in taxes as a percentage of income, even though he seems to know what others should pay.

But I do know one thing; the relationship between corporate taxes paid and those taxes paid by individuals is currently in need of a complete overhaul. Although perhaps it's trite, it's also true that corporations don't pay taxes; people do. So why do we need to pretend otherwise?

In A Short History of the Income Tax, the history of income taxation and the adoption of the 16th Amendment to the Constitution is reviewed. Without going into needless detail, suffice it to say that there is no good reason to tax corporate income completely independent of personal income taxation.

The editorial states that eliminating the corporate income tax and replacing it with added personal income taxation would change the game dramatically for Buffett and other major shareholders of companies. In fact, Mr.Buffett would not pay ~$6.9 million in taxes, as he claims, but would pay closer to $1.6 billion if the corporate income tax were to be replaced with a personal tax on shareholders.

Yes, you read that right. What was a $6.9 million cost to Buffett would have been a $1.6 billion individual income tax expense without the corporate income tax in effect. So what he should pay is somewhere between $6.9 million and more than 200 times that amount. That's a pretty broad range for Buffett and Obama to pick from for achieving fairness, isn't it?

And, of course, there are a vast number of other "fair share" numbers for them to choose for Mr. Buffett to pay as well. However, my point is not to argue how much taxes Buffett should pay but simply to point out that he's not asking the right questions.

The two questions Buffett and Obama should address are the following: (1) What government services do we desire as a society and what will those services cost; and (2) Who should pay what portion of that total government cost?

In other words, if we want $X of government spending on the things we want government to provide, we need to collect $X to pay for that government.

Then if we decide that the top 50% of income earners should pay 100% of the income taxes, and that the top 1% should pay 40%, as they do today, we simply need to send out the tax bills and then collect the total owed.

In the alternative, we could opt for a very simple and broad but still progressive approach to taxation, which makes the most sense of all.

For example, we could require the bottom 50% to pay 20% of the total bill, the next 40% to pay their "fair share" 40%, and the top 10% earners to pay 40% of the total.

If we did that, the bottom 50% of earners would pay ~20% of the total, unlike today's almost zero. And the top 50% would pay 80% of the total. In that case, one half of that 80% would be paid by the top 10% of earners.

Or we could adopt some other broad, simple and progressive method of taxation.

But whatever we do, let's do it in a transparent fashion for all to see and understand, and with an easy way of calculating the tax liabilities due from each person. In my view, that would be "fair."

What would Buffett and Obama propose? I wonder.

We should stop the separate payroll tax payments for medicare, medicaid and social security. These payments would simply become part of the income tax totals, as would taxes for unemployment compensation and the like.

We'd just put all the related income and payroll taxes in one big pot, representing the cost of government. Then we would allocate the total bill to each segment according to how we want the percentage splits to be made between the various earning segments. And so forth.

And by so doing we would eliminate separate payments for corporate income, medicare, social security, unemployment and similar taxes at the same time. Wouldn't that be nice?

The above referenced A Short History of the Income Tax comments on today's hopelessly complex tax system as follows:

"There has since been a sort of evolutionary arms race, as tax lawyers and accountants came up with ever new ways to game the system, and Congress endlessly added to the tax code to forbid or regulate the new strategies. The income tax act of 1913 had been 14 pages long. The Revenue Act of 1942 was 208 pages long, 78% of them devoted to closing or defining loopholes. It has only gotten worse.

The other pernicious consequence of the separate corporate and personal income taxes has been a field day for demagogues and the misguided to claim that the rich are not paying their "fair share." Warren Buffett recently claimed that he had paid only $6.9 million in taxes last year. But Berkshire Hathaway, of which Mr. Buffett owns 30%, paid $5.6 billion in corporate income taxes. Were Berkshire Hathaway a Subchapter S corporation and exempt from corporate income taxes, Mr. Buffett's personal tax bill would have been 231 times higher, at $1.6 billion.

Just as in the late 19th century, the tax code is now hopelessly arbitrary and unfair. It requires a complete overhaul."

There has been too much discussion about companies and individuals who are and are not paying their "fair share" of taxes. Let's stop this nonsense and get on with the real issues that need addressing before we turn into Greece or most other European countries.

Rather than engage in class or generational warfare, as the case may be, let's stop arguing about about why more high earners don't pay more, or why Buffett or his secretary pay at a different tax rate, or whatever else the politicians want to debate.

Taking the politics out of this taxation issue could be as simple as 1-2-3.

First, we choose what level and amount of government services we want and what they will cost. Second, we decide how we want to split and pay in full the bill for that desired government. Third, we pay the bill.

Thanks. Bob.

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