The Buffett Law: Saving the world economy

Posted in Finance Articles, Total Reads: 2121 , Published on 18 November 2011

Amidst the fear of another economic meltdown that the world is facing and the debt crisis looming large on United States of America, As Barack Obama proposed a 3 trillion plan to cut US deficits in the next 10 years, majorly done by raising taxes on the rich amounting to 1.5 trillion, voices of concern are being raised on the feasibility of the law. It is been proposed to charge more tax on people who are earning 1 million or more. Majority of people in this bracket are fund managers, top executives etc. According to current tax laws earning people have pay tax at 35 % on the fixed income and 15% on the variable income. The motive of the new law is to bring the variable pay which in most cases is the higher part of the income for people earning in millions to be charged at an equal rate.

The idea for this law seems to be similar to one proposed by the famous billionaire Warren Buffett. He had proposed to tax the variable pay component of people at the same rate as the fixed income. As many of the rich earn maximum part of their income through variable pay and it is presently taxes at a low rate and this will help raise more taxes. Obama’s proposed law has a striking resemblance to what Buffett proposed and hence is called by many as “Buffett law”. It is an irony that a tax law that proposes a higher tax cut for millionaires and billionaires is named after a billionaire.

The Law proposed by Obama didn’t cheer up the markets and led them to tumble. Investors are  looking at the Obama administration to tackle the debt crises and help the economy rebuild itself. Many are of a belief that if you tax the job creators more there will be less job creation leading to more unemployment. At the same time people supporting the bill are of a view that it is a myth that if you hurt the investors it will reduce the investments. Supporters are also of the belief that increasing the tax will reduce the disparity between the rich and the poor and lead to overall growth and moreover raising income through taxes is need of the hour.

There is an political angle to the story too. Republicans are calling the plan proposed by the Democratic President a populist measure and a political stunt. With presidential elections due in 2012, it is been viewed as a build up for the same by many. Republicans are even terming it to be “class warfare”. Republican who are opposing the tax on rich and who have a control over the “House of Representatives” are confident of blocking the legislation. While the Obama supporters are hoping to leave Republicans with choice of choosing between recessions hit Americans and protecting the wealthy and the rich.

Entire world from the largest of economies to corporate to rating agencies at this time are looking at the Obama administration and the US government to come up with a robust and feasible plan of action to get rid of the debt crises and stabilize the world’s largest economy.

This article has been authored by Aditya Sharma from NMIMS


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