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The Buffett Rule

On Monday President Obama unveiled his deficit reduction plan.  In addition to reducing the deficit, he outlined his ideas to pay for the American Jobs Act he proposed two weeks ago.   No surprise his plan includes tax increases on more wealthy Americans.  Phrases such as “shared sacrifice” and people paying “their fair share” make for good sound bites.  However with Washington, the challenge is often deciphering what their pithy sayings mean.

He referenced the “Buffett Rule” as one of his proposals.  It’s named after Billionaire Warren Buffett who has been rather outspoken about the need to raise taxes on the super-wealthy.  Cueing off of a New York Times op-ed piece written by Mr. Buffett a few weeks ago, the Buffett Rule is supposed to make sure people who make over $1 million a year will pay a higher percentage of their income in taxes than someone who makes less than the $1 million threshold.

You may agree or disagree with the concept of the Buffett Rule.  Regardless if you think it’s a good idea, I have three primary issues with the proposed Buffett Rule.

  1. Additional Complexity.  As a tax professional, I can attest that the tax code is exceptionally complex and at times unwieldy.  With the myriad of deductions, exemptions and exceptions, it will be virtually impossible to make sure some making over $1 million will pay taxes at a higher rate than someone making less.  Everyone’s tax situation is unique, so it’s near impossible to offer such a guarantee.  It may sound simple, but it’s going to be very difficult to achieve.
  2. Increased Tax Avoidance.  While it may be good for those of us in the tax business, I can assure you that there will be a host of tax professionals looking for ways to minimize the tax liabilities of their clients under whatever new rules are enacted.  It’s simple economics.  The higher the tax rate, the more cost-effective it is to pay someone to find strategies which minimize your taxes.   You may have your opinions about what’s fair and right, but there is nothing illegal or immoral about structuring your affairs to pay less tax.  Tax evasion is illegal, but tax avoidance is not.  As I recently wrote, if you personally feel like you aren’t paying your fair share, then I would encourage you to make a voluntary contribution to the U.S. Treasury.  Trust me… they’ll take your money.  Political discourse and debate are fine, but it’s wrong to castigate someone who is abiding by the law because you don’t think the result is fair.
  3. Unintended Consequences.  Congress has a lousy track record of using the tax code to target certain persons.  The Law of Unintended Consequences often kicks in, and the negative ramifications are often much more detrimental than anyone anticipated.  Two great examples come to mind; one recent and one from decades ago.  The 1099 reporting provision included in the health care reform is the most recent Congressional bumbling.  As soon as it was passed, it became clear the administrative nightmare would far exceed any benefits obtained.  Fortunately, Congress repealed it before it became effective.  The Alternative Minimum Tax (AMT) is the classic example of unintended consequences.  The AMT was enacted in 1969 to tax 155 wealthy families who were viewed as not paying their fair share.  By 2008, 3.9 million taxpayers were subject to AMT, and 27% of them made less than $200,000. This probably isn’t what the 91st Congress had in mind.

The Buffett Rule may cause some wealthy people to pay more in taxes, but if history is a predictor of the future, the long-term results will be much different than expected.  Such targeted tax policy generally hasn’t yielded the desired results.  I’m not sure why they think the Buffett Rule will be any different.

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