Smoke and mirrors

The political theatre is not new to snake-oil swindles and chicanery, but the so-called “Buffett Rule” puts all other cheap tricks to shame. Not only will the Buffet Rule have a negligible impact on the financial direction of the nation, it will reduce incentives for investment and distract from the United States’ greater issues like fiscal mismanagement and overspending.

In order to grasp the implications of the Buffet Rule, one must first understand the difference between income tax and capital gains tax. The current income tax system in the United States divides taxpayers into specific income brackets with corresponding tax rates. The more an individual makes per year, the greater the percentage at which he or she is taxed. For example, a tractor-trailer driver would pay 25 percent of a $45,000 salary in federal taxes, whereas a businessman would pay 33 percent on the $175,000 he earned. The businessman would give a third of his income to the federal government while the truck driver would only give a quarter. Income tax acts as a threshold: Almost everyone pays income tax, but those who earn more also hand over a greater proportion of their income. Consequentially, the top 1 percent of earners paid 38.02 percent of income tax collected in 2008—a clear indicator that everyone in American society helps pay their fair share.

Like the income tax, capital gains tax also targets how much money individuals make. Investors who earn more than $34,500 who make a long-term profit in the stock market are subject to a 15 percent tax rate on their earnings, with taxes on short term gains potentially even higher. Unlike income tax, not everyone must pay capital gains—only those who choose to further place their money in the economy must pay. Capital gains tax is applied to money which has already survived the income tax, making it a tax upon a tax and thereby punishing those who invest their wealth in the American economy.

President Obama’s new misguided plan seeks to raise the maximum tax rate on capital gains for individuals who make over $1 million, ostensibly designed to help fill our country’s gaping deficit. There would be some merit in the proposal if the Buffet Rule could appreciably raise revenue; unfortunately it would not. According to The New York Times, the plan would only increase taxes on 60,000 people and raise approximately $13 billion, barely a drop in the bucket.

Even worse, revenue raised by the Buffett Rule would take money directly out of the United States’ fragile money markets. According to Eric M. Jackson, a former PayPal executive and current CEO of CapLinked, President Obama’s plan is much more of a bane than a boon to tech start-ups. Startups that require large amounts of capital rely on “angel” investors, who make high-risk investments into capital-hungry startups. Jackson states, “It is investments from these kinds of individuals that have been the seed money for popular technology companies such as Facebook, PayPal, YouTube, Yelp and many others.” The Buffett rule threatens to stymie startup investment, removing precious capital directly from the economy.

Worst of all, the Buffett Rule is reframing the political debate about fiscal responsibility, and diverts attention from more important issues like entitlement reform and cutting waste. Take, for example, the White House Council of Economic Advisors’ seventh quarterly report on the stimulus, which concluded that each job created by the $787-billion spending package cost the taxpayers $278,000. Or the Civil Service Retirement and Disability Fund’s discovery that it mistakenly paid $600 million to deceased beneficiaries over the past five years. Even purchasing breakfast supplies seems too much for government to handle.... The Department of Justice spent almost half a million dollars on refreshments alone for 10 conferences held throughout last year.

There are easy, painless steps the White House and Congress can take to steer the United States away from the stormy seas of fiscal insolvency. Raising capital gains taxes is not one of them. In the end, the Buffett Rule is little more than a golden apple, a political bauble thrown to the American electorate to sow discord before election season. It is a gaudy sideshow that will do more harm than good, a distraction from substantive debate about our country’s economic future.

William Reach is a Trinity junior and the president of Duke College Republicans. His column runs every other Tuesday.