While some wealthy people do pay a lower rate, that's not necessarily a bad thing.
The Buffett Rule being debated in the U.S. Senate this week focuses attention on those who benefit from tax shelters.
You know, the fat cats who make more than $1 million a year. The people who drive cars on roads. The people who drink water.
About once a year you…ll see a story in the media about how a segment of wealthy people pay little or no federal income tax.
The perception planted by those stories, coupled with billionaire Warren Buffett…s observation in 2007 that he pays a lower tax rate than his secretary, gives rise to the populist notion that there is a crisis in need of action.
Senate Bill 2230, the "Fair Share Tax on High Income Taxpayers" as the Buffett rule is called in Washington, D.C., seeks to capitalize on that sentiment.
There are some inconvenient facts though that interfere with the narrative.
First, findings by the Tax Policy Center, The Associated Press and others indicate Buffett is the exception, rather than the rule, when it comes to the wealthy paying taxes. About 99 percent of those with incomes over $1 million will pay more than the 15 percent deemed appropriate for middle-class wage earners, the Tax Policy Center report found. On average, their tax rate was almost 25 percent. Senate Bill 2230 would increase it to a minimum of 30 percent.
Second, while some wealthy people do pay a lower rate, that…s not necessarily a bad thing.
Many times when you hear about someone with money not paying taxes, it…s because of the way they…ve structured their investments. They may purchase bonds issued by federal, state or local government. Governments use them as a way to raise money for projects needed right away. The investors are paid back over time.
The rate of return on a government bond is generally lower than what an investor could get in the private sector but they are attractive to some for a couple of reasons. They are considered a safe investment. If you can…t trust the government, who can you trust? (Cough, cough).
And the interest income derived is often tax-free. You don…t have to pay income tax on the profit you make.
In the decade before the financial collapse of 2008, Collier County and the city of Naples used hundreds of millions of dollars in bond revenue to build the infrastructure needed to keep up with rapid growth.
Revenue from tax-free bonds built roads, water treatment plants, libraries ambulance stations and parks in a timely manner. If the county had to wait until it collected enough money to pay cash for these facilities we might all still be stuck in traffic at Golden Gate Parkway and Airport-Pulling Road. We might all be trekking to Central Avenue to check out a book or driving around Fifth Avenue South looking for a parking space. The koi ponds at the Naples Zoo might already be paved over. Schools and fire districts all use bonds for their projects as well.
Senate Bill 2230 is given little chance of passing the Democrat-controlled Senate and even less of passing the Republican-controlled House. But it will be a campaign talking point throughout the election. In its current draft form, it wouldn…t tax what are now tax-free bond investments. So it wouldn…t stop the stories about the rich not paying taxes. If Congress tries to get at these people…s incomes, it may well kill the goose that lays the golden egg of municipal infrastructure.
In a speech Wednesday, even President Barack Obama admitted the Buffett Rule is a gimmick — he didn…t precede the word gimmick with "election year" but he could have — that won…t make a noticeable dent in the annual budget deficit the federal government incurs.
But it is an election year so this sort of rhetoric will continue unabated, regardless of the reality.