Amazingly small numbers

My last article covered the Amazingly Large Numbers which aggregate our national liabilities — at over $80 trillion. I commented about how little was being done to deal with these giant sums. In this sequel, I would like to discuss some relatively small numbers which are being given an enormous amount of air time in this election year. The huge amount of hot air being spent compared to the tiny numerical amounts, yields my conclusion that the focus is on political mumbo jumbo and not economic results.

Take the so-called “Buffett Rule” which is one of the cornerstones of President Obama’s re-election campaign. The tax increases under this proposed law would raise the minimum tax on incomes over $1 million to 30 percent. It would do this by increasing the tax rates on investment income — interest, dividends and capital gains from the current 15 percent to 30 percent.

This sounds fair to many people. But as always, I look to the underlying numbers. According to the Obama Treasury Department, not the Republicans mind you, this tax increase would raise at most $5 billion a year. That’s about one-half of 1 percent of the budget deficits we’ve run each of the last five years. It’s a rounding error when compared to the over $80 trillion (less than 1/100 of 1 percent) the country has in debt, and unfunded entitlement liabilities for Social Security, Medicare, Medicaid and now ObamaCare.

It’s frustrating to observe that $5 billion gets more air time than $80+ trillion. To me it shows that politicians are being fundamentally unserious. Where’s the leadership in bloviating about such an amazingly small number? And this is done in the pursuit of “fairness.” In a Democratic Party presidential debate with Hillary Clinton on July 7, 2008, candidate Barack Obama was asked if he would raise capital gains tax rates even if that meant raising less in capital gains taxes. He said he would because it was a matter of fairness.

The president and the Congress are entrusted with the job of running the government. To do that they assess taxes from citizens. How illogical is it to say you want to increase the rate of a tax knowing it would yield less cash? Since when is it the government’s job to decide what’s fair? And how do you measure that numerically? However, if you think that getting the rich to pay more taxes is “fair,” at least figure out a way to make that happen instead of tricking potential voters into thinking that’s what you’re doing when, in fact, you are not. If you think fairness is achieved by soaking the rich, raising the capital gains tax rate accomplishes neither goal.

Historically, when the capital gains tax rate has been lowered (that’s right — not raised, lowered), tax collected has gone up. In 1997, President Bill Clinton agreed to go from a 28 percent to a 20 percent rate. That reduction correlated with an investment boom and capital gains tax revenues nearly doubled by 2000. Then, in 2003, Bush got a further reduction to 15 percent, the current rate, and by 2005, cap gain taxes collected rose 154 percent.

Why? Lowering the tax rate encourages more folks to buy and sell shares and the increased number of transactions combined with greater gains realized creates more taxable gains and therefore more cash paid in taxes available to run the ship of state. A lower tax rate per transaction times many more dollars in transactions, equals more net tax. It’s no different from a store lowering the price of bread and selling more loaves to yield more revenue, albeit at a lower rate per loaf.

Here’s a news flash. If you collect less in capital gains taxes from the “rich” and therefore need more money from another source to run the government, it has to come from the rest of the taxpayers.

Here’s another way of looking at the Buffett Rule. The millionaire’s tax would cover less than 2 days (at about $2.8 billion per day) of our annual deficit spending of over $1 trillion. It may play out as brilliant political theater, but as economics the Buffett Rule is useless.

I am not saying we shouldn’t implement a change in the tax code. Just that this one is essentially meaningless. The country has an amazingly large debt problem. It needs to do several things, including spending smarter and growing faster. The Buffett rule helps with neither.

Richard Shanley, CPA, is a retired audit partner of the accounting firm of Deloitte & Touche. He lives in Salisbury.