Fiscal cliff

As the country heads closer to the so called, “fiscal cliff”, I want to recap some of my recent emails on the subject. Currently the top tax rate is 35% and the president wants to raise that to 39.6% which is where it was before the Bush tax cuts. The president campaigned on the idea of tax fairness and used the phrase millionaires and billionaires when referring to those who are in the top rate. There is a big difference between a millionaire who owns a small business and a billionaire like Warren Buffett. Buffett famously said he pays only 15% in tax which is less than his secretary. He further stated that he should be paying twice that or 30%. Since the top rate is currently 35% why is he paying 15% and the answer is that he does not have income from wages but his income is from capital gains. This means that if the top rate is increased to 39.6% he will still be paying only 15%. If the objective is to have the rich like Buffett pay more, we should increase the capital gains tax from 15% to 30%. By doing this we do not adversely affect the rate that small business pays and this is where jobs are created. If the goal is to bring in more revenue we can increase the rate or we can cap deductions (loopholes). It is not necessary to tell people which deductions they should use but tell them they have a maximum of $40,000. The lowest 50% of wage earners do not itemize deductions so this has no effect on their taxes. Those who do itemize choose primarily between mortgage interest, charitable giving, state tax and property tax. Only a small percentage of those exceed the $40,000 limit so this will have no effect on them. It is estimated that placing a $40,000 limit on deductions will bring in the same amount of revenue as raising the top rate to 39.6% so the current argument between the president and congress is a political argument not an economic one. In addition neither has anything to do with the deficit since the president has already said he will spend the money on infrastructure (shovel ready jobs), education and grants to states. The deficit for this year is 1,100 billion so if we increase taxes by either method that will bring in 90 billion and lower the deficit to 1,010 billion. In other word to truly impact the deficit we must make changes in spending which means reforming Medicare, Medicaid and Social Security and these issues will not be discussed in a serious manner until this tax matter is resolved. Once again politics gets in the way.