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Obama Addresses The Warren Buffett Tax Loophole

[ Posted Thursday, March 27th, 2008 – 15:37 UTC ]

Both Hillary Clinton and Barack Obama have been using the following line on the campaign trail for quite some time now: "Warren Buffett pays a lower tax rate than his secretary does." It is used to show that the ultra-wealthy pay a smaller percentage of the money they make to the government than an average employee does. Warren Buffett himself was the originator of this line, pointing out that it is silly for him -- an extremely wealthy man -- to be taxed at a lower rate than his secretary.

I have been calling on both Democratic candidates (for a while now) to back up their rhetoric on this unfair loophole in our tax system with some actual talk about what they intend to do to change it. Barack Obama has now done so, and he deserves some attention for what he's saying.

A quick overview is in order first. If you make money from a job, it is called "income" by the federal government, and you pay income taxes on it. In fact, if you make money in any of the following ways (as well as many others), it is taxed as income: wages, salaries, tips, interest, alimony, and farm income. If you get unemployment checks, it is taxed as income. Even if you make your money illegally, you are supposed to send in income taxes on the money you make. So pimps, prostitutes, and drug dealers are all (theoretically) taxed the same as if they made their money legitimately. Even if you hold a garage sale and make some money, you're supposed to declare it as income. Pretty much any way money enters your pocket, it is taxed the same -- as income.

Except for one gigantic loophole. If you make your money buying and selling stocks, you pay about half the taxes everyone else does on the money you make as a result. That's right -- half. Warren Buffett figured his tax rate at 17.7 percent, and his average worker's at 32.9 percent because of this.

The money you make trading on the stock market is called "capital gains" and is somehow supposed to be different than money you make in virtually any other way. Now, while millions of Americans now own stock, for most of them it is not their sole source of income, because it is tucked away in a retirement account. The people who do make their main income this way are some of the richest people in this country. And they get to pay half what everyone else does on the money they make.

No wonder the Democrats like to point this out on the campaign trail. But, as far as I am aware, while Obama and Clinton use this as a rallying point in speeches, neither one has grasped the nettle of how to make the system more fair. Until now. In a recent interview with CNBC, Obama was asked the question point-blank, and did not flinch from answering it. Politico has the interview's transcript. When asked "How do you plan to change the tax code when it comes to capital gains? How high will that 15 percent rate go?" Obama answered with the following:

Well, you know, I haven't given a firm number. Here's my belief, that we can't go back to some of the, you know, confiscatory rates that existed in the past that distorted sound economics. And I certainly would not go above what existed under Bill Clinton, which was the 28 percent. I would -- and my guess would be it would be significantly lower than that. I think that we can have a capital gains rate that is higher than 15 percent. If it -- and if it, you know -- when I talk to people like Warren Buffet or others and I ask them, you know, what's -- how much of a difference is it going to be if it's 20 or 25 percent, they say, look, if it's within that range then it's not going to distort, I think, economic decision making. On the other hand, what it will also do is first of all help out the federal treasury, which is running a credit card up with the bank of China and other countries. What it will also do, I think, is allow us to make investments in basic scientific research, in infrastructure, in broadband lines, in green energy and will allow us to give us -- give some relief to middle class and working class families who have been driving this economy as consumers but have been doing it through credit cards and home equity loans. They're not going to be able to do that. And if we want the economy to continue to go strong, then we've got to make sure that they're getting a little relief as well.

When pressed on the issue of people who owned stocks but weren't rich, Obama went on to further state that he'd be open to some sort of exemption for people making under a certain amount of money.

There is, of course, a much easier way to fix the problem once and for all -- one which would probably sound pretty fair to average Americans. That would be to treat all income -- including capital gains -- exactly the same. Any money you make would be income, and it would all be treated the same on your income taxes. This makes all kinds of sense, unless (of course) you are extremely wealthy, in which case you would see it as a giant tax hike.

Barack Obama has left himself open to "he's going to raise taxes" cries from the right, but if he properly frames this as not a giant tax hike but instead closing a giant tax loophole for the ultra-rich then he may be able to break through the media's smoke and mirrors around the issue and explain it to the average voter. It's a risk, and it seems Obama is willing (so far) to take that risk. For that alone, he deserves credit.

Because it is easy to decry the Buffett loophole, but it is politically very hard (especially during an election) to propose meaningful changes to close this loophole. It will be even harder to get it through Congress. But at least one Democratic candidate has finally (finally!) addressed the issue head-on.


[Note: I have not endorsed either Hillary Clinton or Barack Obama as a candidate. If Hillary had made the news on this issue instead of Obama, I would have written this article exactly the same, except for switching their names.]


-- Chris Weigant


2 Comments on “Obama Addresses The Warren Buffett Tax Loophole”

  1. [1] 
    fstanley wrote:

    I think it is all about how this issue is framed. For instance, it should be made clear that the very wealthy have saved/made $$$$ out of this loophole and that this is simply a correction to the tax code.

    I am glad that Sen. Obama answered the question. I wonder if Sen. Clinton has been asked this question and how she answered it - if at all.


  2. [2] 
    Chris Weigant wrote:

    Stan -

    Google "Hillary Clinton" "Warren Buffett" or maybe "Hillary Clinton" "capital gains" to find out.

    Her record is mixed, at best. She voted for lowering (or keeping low) the capital gains tax rate in the past, but mostly more than a year ago. Since the campaign began, there's not much evidence either way. She doesn't address it on her web page (that I could find in a quick look), and her tax policy is geared more toward lots of tax credits for various groups. This is why I didn't include Hillary's stance on it, because I'm not entirely sure what it is. She may support low cap gains tax rates, and even if she does think raising them is a good idea, it doesn't seem to be one of her top tax policy priorities. But she, like Obama, has used the Warren Buffett line on the stump, without explaining what she'd do about it. To be fair, up until now, neither did Obama.


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