Buff Tax

September 20th, 2011 at 10:19 pm

What’s this about a Buff tax!?  Why should men and women with bulging muscles, searing pecks, and six-pack abs have to pay higher taxes than flabbies who eschew the weight room?

Oh, wait…it’s a Buffett tax…on millionaires…so they don’t pay a smaller share of income in taxes than their secretary…that’s different.  Never mind.

Actually, let’s look at this principle for a moment, for “principle” it is—in fact, it doesn’t factor at all in the $1.5 trillion in revenue raised in the President’s budget plan.   The administration laid it out as a guideline for tax reform, a kind of tripwire in the tax code to avoid the problem identified by billionaire Warren Buffet: because much of his income gets special treatment in the tax code, he faces a smaller effective tax rate than many in the middle class.

Here’s the White House’s description of the Buffett Principle:

No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay…this rule will be achieved as part of an overall reform that increases the progressivity of the tax code.

Now, it’s not the case that every millionaire pays a smaller share in taxes compared to middle class families.  But, as my colleague Chuck Marr points out on the CBPP blog, if much of their income derives from non-labor earnings, like capital gains and dividend payouts from their equities, then they likely do pay less as a share of their income.

And in fact, Chuck features a graph showing that the effective tax rate (taxes paid as a share of income) on income and payroll taxes are about 15% for a middle-class family with mostly earned income, compared to 12% for a millionaire (or higher) household with at least 2/3 investment income.

Here’s another look at the same data from the Tax Policy Center.  This figure shows the effective tax by share of investment income.  The effective rate drops by half going from left (more labor income) to right (more capital income).

Source: Tax Policy Center, link above.

Is there a rationale for such favorable, and potentially distortionary, tax treatment?  As noted here, I don’t see it, and the research is supportive of that view.  It’s just another loophole (and another victory for the winning side in the class war, but that’s another issue…)

So if we actually wanted a rule in the tax code to enforce the principle, what would we do?  Here’s Chuck’s advice:

Policymakers can address this situation in several different ways that would make the tax system fairer and also generate much-needed revenue.   Most directly, they could tax capital gains and dividends at the same rate as ordinary income.  Alternatively, they could enact a surtax on millionaires or a more effective alternative minimum tax on wealthy people.

At any rate [sic], it’s apparently safe to pump it up at the gym without inflating your tax bill.

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5 comments in reply to "Buff Tax"

  1. Paul Papanek says:

    Maybe there was a time when under-taxed capital gains boosted productivity, or employment, or investment, or something.


    But maybe not. And certainly not lately. I’ve long thought that the capital gains tax rate was a ruse, justified by pious-sounding nonsense, for the benefit of Silk Suits. Same with the dividend tax rate.

    Why should our tax code penalize actual useful work?

    Let’s abolish this turkey.

  2. perplexed says:

    Yes, but all of this discussion around the “fairness or unfairness” of average tax rates and who pays what % of “income taxes” or “total taxes” obscures the cumulative effects of these rates on the even larger issue of wealth concentration and its effects on marginal propensities to consume. Isn’t the reduction in GNP from the increased savings on the part of the wealthy really a tax on everyone? How much bigger might the economy be if a considerable portion of these savings were redistributed to those with a high propensity to consume or spent by the government instead of being invested overseas? What would be the impact of this on the output gap? Who is really paying this tax?

  3. perplexed says:

    This link was posted in a reply on Krugman’s blog: http://nontrivialpursuits.org/Tax_Policy.htm.

    I’m not really sure, but it seems so well written & organized that I think maybe even some republicans could understand it. What do you think?

  4. Tyler says:

    “Today some decry President Obama’s decision to allow the top-tier Bush tax cuts to lapse, arguing that ‘one should not cut spending in a recession.’ And it’s true: jobs will be lost.”
    – James Galbraith

  5. Geoff Freedman says:

    This will help somewhat, but the problem here is that while we have such significant debt overhang and such inequity in wealth distribution, most ideas to stimulate the economy that don’t involve wealth redistribution, and debt restructuring, become effectively ‘termporary’ measures.

    People that feel poorer than they were before, simply don’t want to spend money, thus dampening aggregate demand.

    Housing prices have fallen over 36% since the high point and are expected to drop another 2.5% this yeay. Recovery of prices is not expected until 2015 and the rate of gain is expected to be about 1.1% in latest projections.

    I don’t think people realize how regressive overall the Bush era tax cuts were when it comes to after tax dollars. The top 1% received over $145000 in after tax dollars. The average break for the middle class was about $1000. It would be best just to let the Bush tax cuts expire.