If anyone would like to put a name and a time to the reduction of taxes on investment income, I cite the Jobs and Growth Tax Relief Reconciliation Act of 2003, which reduced marginal rates for all individual taxpayers, but also capital gains and “qualified dividends.” You’ll note from the tax bracket charts that the top ratepayers got the biggest cut of 3.3 percent, while the three brackets below got a 2 percent cut each and the bottom two saw no change. That may partially explain President Obama’s insistence on the Buffett Rule.
For those who need a refresher, the Buffett Rule entails creating a seventh tax bracket for minimum incomes of $1 million, with a 30 percent marginal rate. This is in response to the 15 percent rate paid on capital gains, ushered in to encourage business investment. Proponents point out that this wasn’t a problem during the Clinton administration, when the top rate was 29 percent. Opponents say it will discourage investment and amounts to class warfare.
Some of you may remember that this sort of thinking was behind the Alternative Minimum Tax, designed to make up for loopholes that allowed upper-income households to pay much less in income tax, or sometimes zero. (It’s worth noting that corporations pay 6 to 8 percentage points less than households, as well as trusts, under this scheme.) The Buffett Rule would be far simpler, but not necessarily fairer, despite having fairness as its intention.
For example, let’s say a household does make $1 million but derives much of that income from a small business or family farm. I haven’t heard about exemptions for those yet. And let’s say a company does make a fair bit of money off investments, but reinvests it into itself to hire a few extra hands, whereas an individual investor uses it to pay for a car elevator. There’s no guarantee that the Buffett Rule would chill investments, but there’s also no guarantee that it would not.
It’s an impossible dream to roll back tax rates to 1999 levels, as much as I’d personally prefer that. Once people get some unnecessary treats from the government, you’ll have a hell of a time taking them away, which explains a lot about why the U.S. budget is in such dire straits. Even if Congress’s collective balls were that big, it wouldn’t address the loophole problem. So the task must be for the government to identify the holes that need the most plugging and, for the love of God, plug them.
Of course, they might also consider growing the aforementioned balls to the point that they wouldn’t be afraid to make some tough choices about needlessly low rates. But perhaps I’m just pissing in the wind myself.
What’s missing in congress right now is any incentive for the group to act collectively out of a sense of what’s best for the country as a whole. Each member of congress has plenty of individual incentives which align with party incentives. But no incentive for congressional group action.
John Haidt’s book (which I keep yapping about) talks about the evolutionary pressures that occur both at the individual level and at the group level. In the absence of group level pressure, you see selfish individual behavior win out. Within the given population, selfish behavior outcompetes group behaviors, and the evolution is towards more and more behavior that benefits the individual at the expense of the group.
That has led me to think that we probably need some sort of explicit mechanism that encourages “groupish” behavior in congress. The only thing that I think would really get it done would be a constitutional amendment that allows voters to cast a “no confidence” vote that dissolves congress and proscribes all of those members from running in the next cycle.