What name flickers your mind when you think about a billionaire who lives a simple life? Who you think aspires generations dreaming to strike big in the stock market? I can’t fathom any other name than the legendary investor Warren Buffett.

Today,  Senate’s vote on the Buffett Rule underlines the fact that our politicians are handpicking winners and losers.

The Buffett Rule is a law proposed after Warren Buffett famously admitted to pay less in taxes than his secretary as a percentage of his annual gross income.

According to Warren Buffett, his effective tax rate is 17.7 percent while the effective tax rate for his secretary — who earns $60,000 — is 30 percent.

There are two primary reasons why Warren Buffet’s effective tax rate is lower than his secretary’s effective tax rate.

First, only the first $100,000 or so is subject to the payroll tax. For his secretary’s income, all is subject to this tax, while only a small portion of Buffett’s income is subject.

Second, most of Buffett’s income is taxed at the lower long-term capital gains rate of 15 percent rather than the tiered ordinary income rates that are in effect for his secretary’s income.

Income generated by working most jobs is taxed at higher rate, while income generated by investments — stocks, buying and selling a company — is taxed at a lower rate.

But this disparity ignores one major fact. Capital gains tax rate is lower to encourage hard-working people with entrepreneurial knack to take risk. Small businesses are the backbone of the growth engine of this great nation. It takes lots of courage, grunt work and persistence to start a small business and to grow it. These small businesses also create employment for people. And these employees pay taxes to our federal government.

The Buffett Rule is targeted for only a small fraction of tax payers — about 400,000 super wealthy — who make over $1 million annually.  They are paying 24.1% effective tax rate. The Rule proposes that these super wealthy individuals should pay 30% tax on their income. The Joint Committee on Taxation estimates that it would raise about $47 billion over the next decade.  It’s good to get more revenue for the federal government, but $47 billions is a drop in the bucket in comparison to over $1.2 trillion in the annual federal budget deficit. Clearly, the problem is not that our federal government needs more revenue, rather it is that the government spending is out of control.

Can $4 billion a year make any impact on the lives of average Americans when our government has gone on the spending binge without thinking about the long-term impact on our economy?

Municipal bond exemption

One glaring exemption in the Buffett Rule is the interest income exemption for those who invest in the municipal bonds. Municipal bonds are issued by the local governments to fund project like local highways, libraries, hospitals, schools and other community projects.  Municipal bonds are attractive to investors due to lower cost and interest tax exemption.

Case for a simpler tax system

Buffett Rule likely won’t pass in the Senate as Republicans are likely to use their filibuster right to strike it down. Nonetheless, it sheds light on an important issue our nation has to deal with — the need for a simpler tax code so that average Americans can keep more of the money they make, and — at the same time — fund our federal government.

Final thought:

My only goal — as a proud citizen of this great nation — is to think independently, and express my thoughts. Even if federal government can raise intended $4 billion a year, how is it going to make my life any better financially? On the contrary, it may get worst if these super rich start investing  heavily into other parts of the world where the tax system is conducive to those who take risk to invest their capital.

Those of us who believe in living within our means, we expect our government to do the same.

What do you think? I’d love to hear your thoughts.

 We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle  — Winston Churchill

(Photo Courtesy: Serbasembillan)