On taxes, Warren Buffet is vested in error

There’s nothing like a political campaign to send the old “BS” meter through the roof, but 2012 promises to put that already worn-out piece of equipment back in the repair shop.

My favorite line of “reasoning” is the so-called Buffet Rule, named for billionaire investor Warren Buffet. The general principle behind the rule says that millionaires should pay a tax rate of at least 30%, or in Buffet’s case, a higher or comparable rate than his secretary’s. Democrats like Tammy Baldwin and Kathleen Falk have embraced it as they mount campaigns for the U.S. Senate and a likely gubernatorial recall, respectively, and legislation has been introduced in Congress.

Actually, that message is a bit muddled. One day, someone representing the Obama administration tries to convince us that Warren Buffet actually has a lower tax bill than his secretary. The next moment, someone else notes that he pays taxes at a lower rate than his secretary.

The first argument is 100%, unadulterated fertilizer; the second is flawed but at least it’s more intellectually honest.

The reason Buffet, the legendary stock picker, pays taxes at a 15% rate is that his income comes from investments, and in a rare example of enlightened public policy, policymakers actually are trying to encourage investment. Set the tax rate too high, and there is less incentive to engage in the very economic activity that triggers the tax, and therefore less tax revenue is derived.

Since it’s hard to fit that on a bumper sticker, and since the mainstream press either is unwilling or unable to explain that tax rates and tax revenue are different parts of the same equation, candidates can take advantage of the general public’s economic illiteracy. In fact, advocates of the Buffet Rule probably view it more as a vote-generating device than a policy that has a good chance to become law.

That’s where the cynicism comes in. Mr. Buffet is not a candidate for office, so his tax records are not available for public consumption. Let’s say, for the sake of argument, that he had a rough year and made the comparative pittance that Mitt Romney earned in 2011 – roughly $21 million. At a 15% tax rate, Buffet would have paid more than $3 million in taxes.

Does anybody really think Buffet’s secretary makes much more than 1/30th (about $100,000) of what her boss pays in taxes, let alone what he earns from his investments?

Ball of confusion

What the Democrats are doing is confusing tax rates with tax revenue, and hoping the majority of voters don’t understand the distinction. Tax rates, which smart public officials try to keep low and comparable with global competitors, are not tax revenue. Tax rates are applied to income and/or wealth assets to derive the income tax revenue that individuals and business entities pay.

In other words, income tax revenue is derived from a simple mathematical equation: Tax rate multiplied by Income/Wealth equals Tax Revenue.

The equation can get distorted in our ridiculously complicated tax code, but for the purpose of raising more tax revenue, history tells us that it’s more effective to raise the income/wealth factor than it is to raise the tax rate factor. Why do you think governments find themselves awash in revenue when the economy expands in a robust fashion? It’s because more wealth is being created that can be taxed, more taxable business activity is occurring, more people are employed and paying taxes, and more companies are forming and prospering – reporting net income, aka profits – and paying taxes on that income.

When Ronald Reagan cut federal tax rates in the 1980s, government revenues did not decrease, they grew as the economy expanded. The reason the federal budget deficit grew in the 1980s is because Washington demonstrated very little spending discipline. Then again, Washington never demonstrates any spending discipline, which is the main reason we’re careening toward a debt crisis. (Kudos for the ’80s boom also go to then Fed Chairman Paul Volker for taming the inflation genie.)

Here is something for any Democrat to consider in a bid to oust Gov. Scott Walker in a recall election: state tax collections are up since Walker cut state income tax rates, in part because even though the state has lost jobs since last July, 21,400 more Wisconsinites are working than when Walker took the oath of office.

President Obama has called for a balanced approach to lowering the deficit, meaning a combination of tax increases and spending cuts. That sounds fair, but the problem is that once the dust has settled following past “balanced” agreements, we always get the tax increases, not the spending discipline. So here we sit – $15 trillion in debt and with a projected 2012 deficit that would add another $1.3 trillion to it.

That’s not light at the end of the tunnel coming toward us, it’s an onrushing train.

If the Republican Party can’t mount an effective counterargument to the Buffet Rule’s inevitable wreckage, it should blow itself up and start all over.