The tax fairness issue raised by President Barack Obama should play well in Northeastern Pennsylvania. The so-called "Buffett rule" comes from statements made by multi-billionaire investor Warren Buffet, who says his personal assistant pays a much higher percentage of taxes than he does.
Most of Buffet's income comes from capital gains. The current federal capital gains' tax rate is 15 percent, which was further highlighted this week with the release of GOP Presidential candidate Mitt Romney's federal tax returns for 2010 and 2011.
Over the past two years, Romney has made over $41 million, and paid an effective federal tax rate of 13.9 percent in 2010, and expects to pay an effective federal tax rate of 15.4 percent in 2011. The highest current marginal federal tax rate in our progressive tax system is 35 percent.
Romney, Buffett, and others in similar wealth position do not pay the highest marginal rate of 35 percent, because the vast majority of their income comes from capital gains, which are currently taxed at 15 percent.
The Republican argument is that capital gains' rates should be lower, because lower rates will translate in to more job creation by the people who earn their income through capital gains versus those who earn their income through employment. After all, it is argued by the GOP that they are the "job creators."
Over the past 60 years, capital gains' tax rates have ranged from a low of 15 percent to a high of almost 40 percent. Even President Ronald Reagan, a champion of lower taxes, agreed to raise the capital gains rate from 20 percent to 28 percent as part of his 1986 tax reform legislation.
Former Reagan economic adviser, Bruce Bartlett, has argued the point for a higher capital gains tax rate in his new book The Benefit and the Burden. Bartlett doesn't argue for redistribution of wealth, but instead believes in tax fairness.
Tax fairness is an issue which should resonate with voters in Northeastern Pennsylvania, whose residents have median incomes of $41,745 in Luzerne County, $42,081 in Lackawanna County, and $54,111 in Monroe County. According to Forbes magazine, income at those levels is taxed at 25 percent for individuals.
When you add on the Social Security tax of 4.2 percent (temporarily lowered from 6.2 percent,) and a Medicare tax rate of 1.45 percent, the tax rate for NEPA median income earners rises to 30.65 percent. Social Security and Medicare taxes top out at $106,800, which means that regardless of home much money you earn, you will not pay more than $6034.20.
The tax picture is even rosier for those making their money through investments only. People who "earn "all of their income on investments are not "wage earners", and therefore, do not pay Social Security or Medicare tax. This tax is only for "wage earners." Investment income is not "earned" income.
So where a wage earner showing income of $50,000 a year will pay 30.65 percent to the federal government. The millionaire or billionaire pays only 15 percent if his or her income comes solely from investments.
Obama's Buffett rule proposes that people making over $1 million dollars a year should pay a minimum of 30 percent in federal tax, regardless of their source of income.
The economic populist message of Obama's "leveling of the playing field" should fare quite well with average wage owners in Northeastern Pennsylvania. Reagrdless of whether Newt Gingrich or Mitt Romney is the eventual Republican nominee, Obama can thank Mitt Romney's "tax issue" for helping highlight tax fairness to the American people.
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