By Stephanie Berenbaum – September 21, 2011
Do Secretaries Pay Higher Taxes than Their Bosses?
We know you’ve had a busy week, so we’re not sure how much attention you’ve been paying to President Obama’s proposed “Buffett Rule” which he unveiled Monday evening. In case you need a quick recep: the deal is that billionaire investor Warren Buffett has been making a big to-do over the fact that his secretary is supposedly taxed at a higher rate than he is. And Buffett proposes it’s time to fix the system so the rich pay their “fair share”.
Class Warfare? And It’s Only Wednesday…
The debate, predictably, turned into a buzzword fest with phrases like “Class Warfare” and “Wealth Redistribution” being tossed around. So, Fab & Fru wanted to know – what was behind Mr Buffett’s claim?
Income By Any Other Name…
As far as we can tell, the main issue here is that not all income is taxed in the same way. You might think that money is money, but it is not, at least in the eyes of the IRS.
Basically, most people earn the bulk of their income through their salaries – called “earned income” The very, VERY rich (like Warren Buffett) earn much of their money through investments. Money earned through investments is called ” unearned income” – it includes things like interest, dividends and capital gains – when you make money off an investment.
What’s the Difference?
“Unearned” (investment) income is taxed at a lower rate than earned income – which explains where Buffett is coming from. And since the uber rich tend to earn more from investments than from actual wages, the bulk of their income may indeed be taxed at a lower rate than the worker whose compensation is mainly from salary. The tax rate is based on what type of income it is. Follow so far?
The idea behind the lower tax rate for investment income has to do with the government giving an incentive to save and invest. And while this applies to anyone with investments, the reality is that this generally benefits the very rich the most because they are simply saving and investing the most…
Does It Matter?
Okay, so I am a big picture kind of person. And while I can see a case for changing the “unearned income” tax structure (in effect closing what many see as a tax loophole for the wealthy), will it really make a big difference regarding the economic crisis our nation is in? I don’t think so. Relatively speaking, very few Americans are millionaires – and the vast majority of tax payers make the bulk of our incomes through salaries – not investment income.
Political Warfare vs Reality
While we understand the buzz around Buffett, we’re going to make it our business to look beyond the Buffett Rule and see what measures are being taken to really help fix our fiscal woes in a more substantial way. It’s distracting and enticing to talk about Class Warfare, but the reality is it’s going to take much more than the Buffett Rule to bring about real change in this economy!