Monday, September 19, 2011

Buffett Tax

President Obama intends to impose a Buffett Tax on wealthy Americans after Warren Buffett said he found it absurd that his tax rate is lower than the tax rate of his secretary and that he is willing to pay more.  Obama's new proposals seek to impose minimum tax rates and remove loopholes in tax code by lowering deductions available to people with over 1 million in annual income.

The president hopes to increase effective tax rate for wealthy Americans. Even though those earning more than 1 million dollars annually fall in the 35% tax bracket, income from investments is taxed at 15%. Given that major part of earnings of the wealthy is from investments the current effective tax rate is lower for them.

However, there is also a line of thinking that the effective tax rate, calculated as above is not correct as the companies (where the wealthy have investments) are themselves taxed at much higher rate (marginal rate is 40%) and the 15% taxes on dividend income is over and above the corporate tax already paid on income earned. In effect, the actual effective tax on income from investments is as high as 40% + 15%*(1-40%) = 49% and not 15% as calculated by Buffett (unless his companies are exempt from paying taxes)

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