Gearing into full election mode just in time for tax season, US President Barack Obama is hitting the road hard with a populist tax plan that plays to crowds like a billion dollars. Or, rather, like a billionaire.
For months now, Obama has been touting a "fairness rule" for taxes named for investment guru and money maven Warren Buffett that would set a floor for the minimum amount of income tax the wealthiest Americans pay. Buffett famously wrote in a New York Times op-ed that due to a skewed tax system, his secretary effectively paid a higher percentage of her income in tax than he did.
"What I paid was only 17.4 percent of my taxable income," Buffett wrote, adding that the other 20 people in his office paid much less. "Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent." It''s not isolated to Buffett. Obama and his wife paid an effective federal tax rate of 20.5% in 2011, while his millionaire opponent Mitt Romney effectively paid only 13.9% in 2010.
The reason is that while most Americans pay income tax and a payroll tax on the majority of their earnings, which they receive as wages, the wealthiest usually earn a significant chunk of their money from investments, and (after the first year) only have to pay a capital gains tax (and no payroll tax) on the returns they get. Add on top of that a series of tax loopholes and deductions, and the ostensibly progressive American tax code can be awkwardly regressive in practice.
While true that the Buffett Rule can only make a small dent in the deficit, the divisiveness of the argument seems ludicrous to Israeli observers.
In the wake of the social protests here last summer, the government took to passing economic recommendations from the Trajtenberg commission aimed at increasing "social justice." While American politicians are set to battle over the Buffett Rule through the election, in Israel it took only a few months for the cabinet and then the Knesset to pass the first series of policy updates, which happened to be about taxes.
Among the recommendations passed? Raising the income tax to Israel''s highest earners from 45% to 48% (instead of letting it fall to 44% as planned), increasing capital gains taxes 5% and adding a 2% "high-earners tax" on all income exceeding NIS 1 million.
Some might argue that these new regulations aren’t quite the same as the Buffett Rule, and they would technically be correct. In practice, however, Israel doesn’t need a Buffett Rule because high-income earners actually pay high taxes.
It would be “almost impossible,” for a high-earning Israeli to pay taxes as low as Mitt Romney, says Larry Stern, CPA and head of US tax at Shtainmetz Aminoach & Co. “Actually, I think it is impossible.”
In Israel, there are far fewer deductions than in the US, where state tax payments, mortgage interest and proprety tax (the equivalent of arnona) are deductible. In fact, says Stern, a US tax-payer living in Israel can deduct arnona from their US tax, but not their taxes in Israel.
Even those people earning investment income pay, thanks to Trajtenberg, a 25-30% capital gains tax (the higher rate is for majority shareholders). Compare that to the 15% paid in the United States.
Another difference is that in Israel, there is a low-income bracket for payroll taxes – taxes on social security and health taken right out of the paycheck – that does not exist in the States. While that doesn’t affect the rich, it keeps taxes lower for the very poor; in America, even those exempted from income tax pay the same payroll tax rates.
Given socialist influences on Zionist ideology, the generally European governing outlook Israel inherited and a public willing to take to the streets for a whole summer in search of social justice, it should come as no surprise that Israel could pass policy in the vein of the Buffett Rule far more easily than United anti-Statists.
In fact, just on Monday, the US Senate formally blocked the Buffett Rule''s passage.