The Buffett Rule Facts

Uninformed journalists use a superficial approach to the Buffett Rule story rather than an in-depth examination of it. It all begins when journalists jump to the middle of the story instead of starting at the beginning. When you skip over critically relevant details of a story, false assumptions tend to serve as fertilizer for intellectual dishonesty and political chicanery.
Understanding the so-called Buffett Rule requires a basic realization of how businesses obtain access to capital financing and pay dividends. First, “capital” is money that has been saved for the future by human beings AFTER state and federal income taxes are paid. Combined tax rates on high INCOME in some states runs close to 50%. This means most capital is formed with what remains after about half the original income stream has already been taken away by state and federal governments. That is right, half.
Understanding the second part of the Buffett Rule story requires a grasp of the facts regarding how dividends are already taxed. Dividends to shareholders are only paid AFTER income taxes have been paid. Proponents of the so-called Buffett Rule always skip over any mentioning of the heavy taxes already paid on capital formation and on dividend income when describing the mathematics of taxing the “rich.”

Though both dividends and capital gains are derived from sources that have ALREADY BEEN TAXED ONCE, these second sets of cash flows are subjected to yes, you guessed it, a second series of state and federal income tax levies. However, because of the critical value of having after-tax capital available for future job creation, the rate of the second round of federal income taxation is capped at 15%. The second federal tax levy is also capped on dividends paid to shareholders at 15%.

When these additional rounds of taxes are piled on, the total income tax rate currently paid in 2012 on realized capital gains and dividend income in high tax states comes to about 78%. In the case of short term capital gains, income tax rates are even higher.

When you hear politicians making speeches that specifically single out the so-called “rich,” and accuse them of not paying their “fair share,” they always skip over the all important details described above. Why? Politically it just won’t work if all the layers of taxes are explained to voters.

If you prefer facts you should know that multi-layered tax rates on dividends and capital gains are more than fair already because federal and state governments are allowed to tax these streams of income not once, but twice. Don’t kid yourself. Politicians know these facts. However, some still try to convince uninformed voters to think it is just fine to stick it to savers and investors because, well, because they are “rich.” It isn’t just fine. Pitting big government against people who are already paying taxes not once, but twice is foolish. Let’s all repeat this together. Savers and investors already pay taxes twice.

Savers and investors are not the problem. Power hungry politicians that traffic in financial ignorance are the problem.

The Buffett Rule Facts