Class war or a fairer system? – Obama’s Buffett rule polarises US opinion

20th September 2011

The rule is named after the billionaire investor Warren Buffett who earlier this year suggested it was wrong that he was paying less in taxes than his employees.

In issuing his plan, the President echoed Buffett, suggesting a teacher earning $50,000 shouldn't pay more tax than a hedge fund manager earning £50m.

Business Week quotes Robertson Williams, a senior fellow affiliated with the Tax Policy Centre, suggesting that any new tax would involve the creation of new definition of income while setting a minimum rate for it.

But it is not just the taxes for the wealthy – and the many loopholes they can take advantage of – that makes the picture so complicated. The middle class tax picture is complex too.

Business Week writes that "Under current law, that teacher [on $50,000] would have a maximum taxable income of $40,500, after subtracting the standard deduction and personal exemption. The teacher's federal income tax would be $6,250, or 12.5 percent of the $50,000 income.

"The teacher's tax rate, though, would be higher if payroll taxes were included. It would be lower if the teacher took advantage of the specific breaks available to middle-income taxpayers: those for retirement savings contributions and health-care flexible spending arrangements, and deductions for student loan interest and out-of-pocket expenses of educators.

"The tax rate would be even lower if the teacher were married or had children, which would allow for a larger standard deduction, personal exemptions and a child tax credit."

ABC News does a fact check on the issue. Its conclusion is that the tax you pay is more likely to depend on how you are paid. Someone receiving with a high salary may well pay more tax than someone in the middle income bracket. If they take their income in the form of capital gains, then they may well pay less.

Therefore one issues any tax reform would have to grapple with is the fact that since Ronald Reagan equalised income tax and capital gains tax in the 1980s at 28 per cent, income taxes have been gradually raised and capital gains tax cut.

Top rate income tax is now 35 per cent while top rate capital gains tax is 15 per cent.

In terms of reaction, features the views of President Clinton's former Labour Secretary Robert Reich.

He wants Obama to go much further.

"A 20 percent rate is still ridiculously low compared to what millionaires and billionaires ought to be paying. Officially, income over $379,150 is supposed to be taxed at 35 percent.

"And even 35 percent is a pittance compared to the first three decades after World War II. Before Ronald Reagan slashed taxes on the rich in 1981, the highest marginal tax rate was over 70 percent. Under Dwight Eisenhower it was 91 percent. Even if you include deductions and credits, the rich are now paying a far lower share of their incomes in taxes than at any time since World War II."

However the Republicans have accused the President of class warfare.

ABC News quotes representative Paul Ryan saying: "Class warfare will simply divide this country more. It will attack job creators, divide people and it doesn't grow the economy. Class warfare may make for really good politics, but it makes for rotten economics."

Website Americans for tax reform believes the President's agenda is to create an Alternative Minimum Tax which it says will catch millions of Americans.

It argues thus – "The capital gains tax is a second bite at the tax apple, not a preferential treatment of investment.  First, a taxpayer earns money and pays taxes.  Then, he pays taxes again when his after-tax investment makes a profit.  Put another way, most capital gains are returns to shareholders of after-tax corporate profits-money which has already faced taxation at the corporate level.  Raising the capital gains tax would make this double-tax worse.

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