Seems old Warren is right --- Raise the capital gains tax rate

In 2008, Hilary Clinton spoke of the 3:00am phone call, last night Warren Buffett asked Jon Stewart about the 1:00am phone call.  Buffett asked Stewart if Buffett called Stewart at 1:00am with a spectacular money making idea would Stewart ask him what tax rate he'd have to pay on profits.

Stewart responded by saying, "why are you calling ME at 1:00am?," but the point was well taken.  When it comes to making money, isn't that the point?  Making money, not marginal tax rates.

The true significance of Mitt Romney's unsuccessful Presidential campaign may be in highlighting to Americans the ridiculously low federal tax rate he and many other multi-millionaires pay.  Romney's effective federal income tax rate was under 15 percent for the two years he released, and the reason 2011's rate was lower was that he didn't use all of his charitable deductions.

The reason Romney and other multi-millionaires pay such a low rate is that most of their income is generated by capital gains.  Capital gains or income on investments is taxed at only 15 percent, whereas regular earned income is taxed at 35 percent for the highest income brackets.

Individuals also pay Social Security and Medicare taxes as high as the 15 percent self-employment tax on all income below about $108,000.  These taxes max out at that level.  That means that whereas an individual who earns $108,000 pays $16,200 or 15 percent in additional taxes, someone making $1 million a year also pays $16,200, but only an additional 1.62 percent.

The GOP has argued that the "job creators" (the term the GOP uses to describe the richest Americans) have to have low rates or they won't invest.  Buffett and a growing number of the "job creators" disagree as illustrated in Buffett's 1:00am phone call.

Buffet suggested a capital gains rate of 30 percent on all investment income over $1 million and 35 percent on all investment income over $10 million.  OVC whole-heartedly agrees.  The notion that a 15 percent capital gains tax rate is fair is totally misguided, and anyone who really believes that deficit reduction is important should agree.

We live in a nation where income tax rates are progressive, in that the more money one makes, the higher rate of taxes one should pay.  The two major reasons for a progressive tax rates is one of fundamental fairness that wealthier people have more money to contribute to the general welfare and one that wealthier people get more benefits from the federal government.

This second reason is sometimes very misunderstood.  GOPers tend to think that only the poor benefit from the federal government, but such is not the case.  Wealthy people may not get direct benefits as does someone collecting food stamps, for example.  However, wealthy individuals receive indirect benefits like roads, bridges, student loans and grants for employees, air traffic controllers, national defense, and other big budget items.

The time has come to make capital gains tax rates progressive.  Let's start at 10 percent and make some marginal rates up to 35 percent like Buffett suggested.

*Buzz did not participate in the writing of this post.  He has been on assignment in Colorado and Washington, since November 7th.  He did check in yesterday, but said it felt like he was only gone a few hours.*

Back in the 1980s

Buzz and I spent part of the Labor Day listening to historical speeches on the POTUS radio channel.  I won a 2 year subscription in a WNBA trivia contest (no purchase necessary.) We listened to a 1987 speech by President Ronald Reagan.  Reagan was touting 59 months of economic prosperity, so we decided to look back at some of the economic policies in place back in 1987 as compared to 2012.

Tax Rates

From 1982 to 1986, the highest marginal tax rate was 50 percent and 38.5 percent in 1987.  The capital gains tax rate was 20 percent from 1982 to 1985 and 28 percent from 1985 to 1990.

Republicans have fought tooth and nail to extend the Bush income tax cuts, especially when it came to the highest marginal rate.  They even went as far as voting against a bill in the United States Senate that extended all the tax cuts except the cut on the highest marginal rate.  (Bush's tax cuts reduced the highest marginal rate from 38.6 percent to 35.0 percent.)

The current highest marginal tax rate stands at 35.0 percent, and the capital gains tax rate is 15 percent and has not been about 16 percent since 2003.

Perhaps Republicans who worship everything Reagan should consider returning to the Reagan tax rates, particularly the capital gains rate, since after all, that's the tax that the job creators pay.

Welfare Queens

Reagan famously spoke of the "welfare queen."  He said, "(S)he has eighty names, thirty addresses, twelve Social Security cards and is collecting veteran's benefits on four non-existing deceased husbands. And she is collecting Social Security on her cards. She's got Medicaid, getting food stamps, and she is collecting welfare under each of her names. Her tax-free cash income is over $150,000."

The welfare queen never really existed, a product of Reagan's speech writer's imagination, but welfare or public assistance was quite different in the Reagan years.  There was no work requirement, and there were no limits on the time a person could collect welfare.

All of this changed with the Welfare Reform Personal Responsibility and Work Opportunity Reconciliation Act of 1996.   As Bill Clinton said the act "ended welfare as we know it."

The new law required persons to work after receiving two years of benefits and placed a five year lifetime limit on welfare benefits.  Despite Romney claims that President Barack Obama has gutted the work requirement, he hasn't.  So welfare today does have those restrictions from 1996.

Maybe nostalgic Republicans would like to go back to the Reagan era welfare for life with no work requirement.

Investment Banks

Until 1999, there was a clear dividing line between what banks could and couldn't do when it came to investments.  As a result of the excesses of the 1920, the federal government passed the Glass-Steagall Act of 1933.  This Act prohibited depository banks from gambling on investments in the stock market.

Glass-Steagall survived until 1999, when Congress decided there was no need to separate these banking practices.  Republican Senator Phil Gramm (TX) and Republican Representatives Jim Leach (IA) and Thomas Bliley (VA) sponsored legislation that tore down the barrier.  There was no longer a distinction between depository and investment banks.

Depository banks could now play the market, and play the market they did.  After 8 years of the Gramm-Leach-Bliley law, banks had invested in so many toxic and risky investments that they almost brought the world to economic disaster.  The situation was so dire that even President George W. Bush, a self-professed free market lover, pushed for an $800 billion bailout of the Wall Street banks.

Most of the economic woes we are still experiencing in 2012 can be traced back to the banking debacle of 2008.  Even Ronald Reagan realized that banks gambling in the stock market was not a good idea.

Back to the Future

So the next time someone tells you about the glory years of Ronald Reagan and his great economic recovery, tell them you agree that it was a great time --- higher taxes, particularly on investments, no limits on welfare, and highly regulated banks.