In defense of wealth – Part 2

A lot of noise has been made lately about Mitt Romney and Warren Buffet’s tax rate being so low, while Buffet’s secretary’s tax rate is much higher. For starters, I don’t know what the secretary makes, but it has to be much higher than what I make, because I don’t think I’ve ever paid more than 15% Federal tax. Certainly never as high as the 35.8% she reportedly pays. I don’t pay that much with Federal and State combined!

But more importantly the whole issue brings up the issue of the tax code in general, and whether it’s fair or not. Romney and Buffet, evidently, derive most of their income from capital gains, ie. returns on investments, which are taxed at a lower rate. On the surface, which is about as far as most people look before they pass judgment these days, this looks bad: rich people getting lower tax rates because they are rich.

But do you know who else gets capital gains that are taxed at that rate? Just about anyone who owns stock, a mutual fund, or any other investment that might render capital gains. And who is that? You. Me. Anyone with a 401k, IRA investment account, mutual fund, or pension fund. More pointedly, it’s anyone who is retired and living off their investments.

That’s why the capital gains tax is lower. It’s to help the retirees keep more of their money. That’s not to say that the wealthy don’t take advantage of it. That’s not to say that things couldn’t be arranged differently to distinguish between the truly rich and the retirees living off their investments. But we need to stop and think before we just jump in and change things willy-nilly.

Take the “Buffet Rule”, which calls for millionaires to pay at least 30% taxes. That sounds fine and good, until you look at who qualifies as millionaires. Nothing I’ve read so far specifies whether that means people who make more than a million dollars in a year, or simply anyone who has more than one million dollars in assets. If it’s the latter, be careful. You’re threatening Grandma again.

In order to retire and live comfortably off the interest these days, and assuming a 10% rate of return (which nearly no one has been able to manage the past few years) you’d need at least $500,000 in investments. Factoring in inflation and the fact that people live longer you really need to be pushing closer to a million to be safe. My financial advisor tells me we need to be aiming for more like $2.5 million by the time I retire if we’re to survive at even close to a comparable income level. If you start taxing me at 30% I’m going to have to have even more invested.

Why is that fair to me just to get even with some rich people? Romney and Buffet pay more taxes in one year than I’ll pay in a lifetime. But if you want to go after them, fine. Go after them. Just make sure you hit what you aim at or you’ll hurt a lot of innocent people in the process.

And that’s the problem with Washington these days. They don’t think before they act. While it’s practically impossible to pass a law that won’t have some unintended consequences, our politicians these days specialize  in it. Like the housing laws that made banks give more loans to bad credit risks in the name of helping minorities. Good idea, bad execution, lots of unintended consequences that we’re all now paying for.

Like I said, I’m not saying the tax code doesn’t need work. Au contraire, I’m convinced it does. But don’t touch it unless you’re willing to risk unleashing a can of worms you may not have intended.