EconoMonitor

The Buffett Rule Is A Good Idea

Some high income Americans pay a lot of tax; others do not.  If you have right tax advice and if most of your income can be structured as some form of “capital gains”, your marginal rate – what you pay on the your last dollar of income – may be very low.  The highest marginal income tax rate currently is 35 percent, while long-term (over a year) capital gains are taxed at 15 percent at most.

The Buffett Rule is a proposal is establish a minimum tax rate for “millionaires” – people earning more than $1 million per year – and the Senate is likely to vote on a version this week.  The exact amount of revenue that this would bring in depends on the details, but there is no question that it is small relative to the country’s need to control the federal budget.  (The Joint Committee on Taxation scored one version of this proposal as generating about $30 billion over ten years; the annual budget deficit will remain over $1 trillion in the near term even under the most optimistic projections.)

The biggest sticking point for any reasonable strategy to control the US federal budget is that one side – the Republicans – steadfastly refuse to raise taxes, at all and on anyone.

There are three ways forward.  Either the Republicans begin to compromise – and agree to raise taxes as part of a comprehensive deficit reduction and debt control strategy, just as Ronald Reagan did.  There is a great deal of confusion about whether Reagan raised taxes after first cutting them; see chapter 3 of White House Burning for the details of what actually happened.

Or the Republicans who have signed the Taxpayer Protection Pledge will prevail – no one’s taxes will go up and, most likely, some people’s taxes will go down.  In this case, either the deficit will continue to grow (which is what Newt Gingrich is proposing) or Medicare and almost everything else the federal government does will be scrapped (which is the position represented by Paul Ryan).  My guess is that, in this scenario, we will say farewell to any meaningful form of social insurance – good luck getting healthcare when you are 85 (unless you earned over a million dollars a year for many years).

Or the Republicans will lose big – and fiscal consolidation can proceed without them.

A complete loss of support for the Republicans seems unlikely – they will surely hold more than 40 seats in the Senate for the foreseeable future.

So the fiscal trajectory of the country – and whether Social Security and Medicare survive – depends very much on whether the Republicans will compromise on taxes.

The Buffett Rule is a tiny tax, of little consequence to the people who would pay it or to the country as a whole.  The idea that $30 billion of additional revenue would tip the balance in any way is simply ludicrous.

But this is precisely what gives the Buffett Rule its powerful symbolism.

Much of federal government public finance is complex and hard for people to comprehend – demystifying deficits and debt is a major reason we wrote White House Burning.  Some of the reaction to our book is encouraging, particularly from people who are willing to spend some time with the details.

But the question behind the Buffett Rule is crystal clear and does not require you to buy a book or even read the newspaper.  Should all high income Americans pay a moderate level of tax?

This post originally appeared at The Baseline Scenario and is posted with permission.

6 Responses to “The Buffett Rule Is A Good Idea”

EdDolanApril 16th, 2012 at 12:20 pm

The problem that the Buffet rule addresses is a real one–effective tax rates on higher earners should not be lower than those on lower earners. Let's grant that.

Still, the Buffet rule itself is a clumsy fix. It fails to attack the underlying problems of the tax system–too narrow a base, too many loopholes, and marginal rates that are too high but do not bring in adequate revenue. The Buffet rule makes the system more complex than ever. It encourages people near the magic $1,000,000 limit to game the system even more vigorously.

What we need is comprehensive reform, beginning with reform of the system of capital taxes and corporate taxes. The result should be a system that is more efficient, with lower marginal rates at all levels of income, and at the same time, more equitable in asking high earners who now qualify for extraordinarily low rates to pay a fare share of total taxes.

The Buffet rule only looks simple. It is political theater. The best thing about it is that we know it has no chance of passing. Put it up for a vote, let it fail, then get serious about tax reform.

Gary PitkinApril 16th, 2012 at 2:06 pm

Ed is 100% correct, overhaul the entire public and corporate tax systems. The Buffet rule is a bad smoke screen to cover what really needs to be done.

SteveApril 16th, 2012 at 10:23 pm

Why was the cap gains tax lowered to 15%? I assume it was to incourage investment. What is the impact of increasing it to 30%?

justmeApril 17th, 2012 at 8:31 pm

you're right. Capital Gains was lowered to 15% to promote investment. What nobody wants to acknowledge is that there's a certain amount of risk that accompanies investing. People seem to overlook the fact that this money was earned by someone risking their current assets. Investing is what makes it possible for companies to grow, to hire workers, and to research new technology. If the return on investments will be cut to only 70% then I'm sure investing will decline and its effects will be felt everywhere.

Regardless, these people didn't get to be millionaires because they're idiots. I'm sure Obama could raise the tax to 40% and many of them would find ways to circumvent it.

benleetApril 17th, 2012 at 11:21 pm

The top 1% of earners pays 29.0% effectively to federal, state and local, while an income of $68,000 pays 28%. See CTJ site: http://ctj.org/ctjreports/2012/04/who_pays_taxes_…
An income 20 times larger than the 80th percentile pays almost the same tax rate. Is this progressive or fair? Not really. The top one percent of earners takes in over 21% of all income, and in 1979 it took in 8% of all income. After taxes and after all government transfers, the shift in income share, 1979 to 2007 went from 8% to 17% for the top 1%. If the bottom 80% of earners had the same share as 1979, each household would have over $10,000 of income each and every year, and the economic crisis would be over. My blog, http://benL8.blogspot.com

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