With all this talk about the recession, and no light at the end of the tunnel, there are some wild ideas being thrown around about how to turn that light back on.  I was thinking about it, earlier today, when Obama launched “the Buffet tax”.   Yikes, I thought, Buffet is putting himself out there, and Obama seems to be taking this for all it’s worth.   Maybe it was Buffet’s intention, but I just can’t help but think Obama might have taken it a little farther than Buffet desired.

There are rumors buzzing about a tax that will only hit those who earn more than $1 million in one year.   I think that’s great.   They are already taxed at 30% roughly, but their effective tax rate is really closer to 20%, because of the lucrative tax treatment of long-term investment income.   Long-term investment income is income from things like stocks and bonds that are held for greater than one year.   This means that you are not in the business of buying and selling investments, rather you are truly investing in instruments that fuel economic growth.

Ok, so we know there is favorable tax treatment on investment income, but who can invest?   Someone in the middle class is making enough for the mortgage on their house (or rent), student loans (Ok, I am biased on that one), living expenses, vacation expenses, and who knows what else.   Make sure you are putting into retirement.   A good 401k or IRA will trump investment income tax treatment, so you should go that way first.   As much as you can!

In order to realistically take advantage of the investment income tax treatment, you have to really discipline yourself to limit purchases that aren’t necessary.   If you do this, you will be doing well for yourself, regarding the beneficial tax treatment, and for the economy.

Well, now let’s say you have millions and millions of dollars.   What are you going to do with that money?   Spend it (that is the best way to fuel the economy), have it taxed at 30% or so, or invest it?   Well, a frugal man such as Buffet will of course invest it.   See now that we have this benefit, all the wealthy have the majority of their income ALREADY IN investments.   Tax breaks won’t help, because all of their money is invested.

I think we should KEEP the favorable tax treatment on investment income for the middle class, maybe cap the treatment to 10% of AGI.   That seems like a quick fix.   The rich will invest no matter what, but we don’t want to lose the investment income of the opportunist middle class.
Kevin