The Buffett Rule Makes Sense to Me…You?

April 10th, 2012 at 2:25 pm

It’s all Buffett rule around here, and I must say, after careful deliberation, I’ve decided that this idea—to put a federal income tax floor of 30% on households with at least a million bucks—makes sense.

Think of it as a simple way to cut through a bunch of nonsense in the tax code that leads to outcomes like this:

–In 2009 (most recent data) 22,000 millionaire-and-up households paid less than 15% in federal income taxes, and about 1,500 paid nothing.

–The 400 richest Americans, with average incomes over $100 million, paid 18% in federal income tax.

–These average tax rates have fallen sharply over the years, due both to cuts in the basic income tax rates, and particularly to much larger cuts in taxes on asset-based incomes, like capital gains.  According to the White House’s release on this: “the wealthiest 1-in-1,000 taxpayers pay barely a quarter of their income in Federal income and payroll taxes today—half of what they would have contributed in 1960.”

–Rich people spend a lot of time and resources figuring out ways to tap all the loopholes that favor capital income, income earned abroad, income borrowed against your stock holdings.  That’s one way you end up with a ratio of US foreign companies’ profits to GDP of about 550% in the Cayman’s.

Source: Treasury report on business tax reform.

Sure, it’s about fairness.  But it’s also about taking inefficient distortions out of the tax code.  Perhaps if those with these kinds of resources—and remember, we’re talking about households who reside within the top half of the top income percentile—spend less time tax planning they can spend more time doing actual productive stuff.

Two more points.  First, there’s an argument I’m hearing today that we shouldn’t bother with the Buffett rule because it would only raise enough revenue to reduce the deficit a little bit.  That’s a terribly weak argument, a lot like an overweight person saying that since he can only exercise for 10 minutes today, he might as well just go have an ice-cream cone instead.

Any time we can close a tax loophole and generate both more fairness and any level of fiscal improvement we should do so (think about the carried interest loophole in this regard).  And the score on the Buff rule is that compared to current law—Bush cuts sunset as planned—it raises about $50 billion.  Compared to current policy—the tax cuts stay in place—it raises $160 billion.  Either way, that’s real money.

Second, here’s a useful, albeit somewhat complicated graphic.  It shows the distribution of tax rates for various middle and high-income households.  The tenth percentile person in the $50-100K range pays 7% in income and payroll taxes; the 90th percentile person pays 21%.  So what you see here, for example, is that the typical middle-income household, at 13%, pays about the same tax rate at the 10th percentile super-rich ($100 million+) household.

Source: WH report, link above.

So, yeah…I’d say we need the Buffett rule.

Update: Tim Noah over-analyzes me.   As a chin-stroking, brow-furrowing econ policy wonk, I deliberate over pretty much everything (the egg salad or the tuna??  Simplify, simplify!).  But I think the text above provides pretty full-throated support for the BR and that’s no BS (and I don’t mean Bowles-Simpson).

 I should send Tim some of my dreams for deeper analysis—like this one.

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18 comments in reply to "The Buffett Rule Makes Sense to Me…You?"

  1. oli3 says:

    OK, and on the corporate tax side, let’s lower the corporate tax rate, even to 25%…


    Put a federal income tax floor of 15% on corporations.

    So if you are GE, for example, whether you hire 90 tax experts or 900 like you have now, the lowest you can go is a tax rate of 15%. (Or make it 20% if you like).

    Take all the deductions you want, but when you get to the floor, that’s all you get to take.

  2. Tyler says:

    If President Obama wants to make the federal income tax more progressive, why not propose a tax cut for the middle class?

    The Buffett Rule will do absolutely nothing to end this depression.

    A depression should be defined as “a period of at least one month in which the national unemployment rate exceeds eight percent”. This would mean we’ve been in a depression for the past three years, which sounds just right.

    • Michael says:

      The Buffet Rule is not related to the depression, no. That doesn’t mean it isn’t good governance.

      • urban legend says:

        Because the wealthy do not spend these marginal dollars, raising taxes on the wealthy is a way to build a better tax structure for long-term deficit repair without negatively impacting current economic recovery. With a sane Congress — in other words, a Congress more or less without Republicans — this would make it easier to build the political pressure for economic growth through long-term infrastructure fixes and modernization.

  3. urban legend says:

    I’ve read a number of things about the “Buffet Rule,” and I have yet to see anything that discusses the Alternative Minimum Tax. Given the existence of the AMT, which includes rates on capital gains only slightly lower than on other income, how can someone like Buffet or Romney get away with paying an effective rate of 15%.

    In all the comments I’ve seen, it’s as if the AMT never existed. Could we simply modify and improve that?

    • Th says:

      Yea, wondering the same thing. Also thinking the Buffet rule should be sold as closing an AMT loophole since we all know who the AMT came from.

    • urban legend says:

      Come on, Jared, read your readers’ comments and explain this. I don’t see anyone else yet who can do it.

      • Jared Bernstein says:

        You mean re amt? Will do later.

        • liam says:

          I don’t understand why the President doesn’t tie-in the Buffet Rule with the AMT. It gives him a precedent dating to Reagan, and not only does it frame the debate in terms of the rich paying their fare share, it also could be framed as changing a ‘bad’ law (since it isn’t indexed to inflation and has been adjusted independent of normal tax rates) that is unfair to many to a good law that’s more equitable to all.

          The current AMT is also an example of congressional ‘fuzzy math’ since the patch is never budgeted; having the CBO score with indexed triggers would show just how much more revenue the US could expect from it’s high earners, and just what their tax rate would be.

          Also – if I can throw this out there – the argument I always hear about raising rates on investment income is that unlike regular income the investor could lose all/part of his/her money, so it’s unfair to tax a risky investment in the economy at the same rate as salaried income. My question is: doesn’t that mean we are subsidizing investor risk (call it reverse-Norquistian logic), and is that something that needs subsidizing?

  4. LynnJo says:

    It might be easier to generate widespread support for this viewpoint if people who write blogs would stop lumping “millionaires” with “people who earn $1 million per year.” Some retired couples have managed to collect more than a million dollars in assets, but that gives them incomes in the middle class range. It takes a net worth much higher than $1 million to make someone with no other sources of income “rich” in today’s world.

  5. Michael says:

    This feels a lot like posturing — take an issue where yes, there is an obvious crying need for reform, but which isn’t fundamentally that huge a deal, and pound the table during election season.

    Yes, it’s bad that rich people don’t pay their share in taxes. No, that’s nowhere near the worst thing that rich people did today to us.

  6. readerOfTeaLeaves says:

    Claims that the Buffett Rule ‘won’t raise enough revenue’ are red herrings — intended to distract from a deeper set of connected issues that libertarian-Free Market ideologues will do almost anything to avoid. They cannot admit that their version of financialized capitalism is premised upon accounting fictions and tax havens – as the evidence of the Caymans and Bermuda statistics included in this post clearly reveal.

    Warren Buffett famously scorned the ‘2-and-20 Boys’ (aka, corporate raiders like Romney) who bought corporations using leverage, then creamed off the assets (using tax havens and elaborate accounting), and left those companies loaded with so much debt they were no longer economically competitive.

    In other words, the ‘2-and-20 Boys’ destroy and extract value rather than create it and the tax code continues to enable (and perpetuate) this kind of socially destabilizing, economically perverse activity.

    Regrettably, conservatives who admire Romney and his ‘2-and-20 Boys’ cannot withstand critiques about **the nature of their financialized capitalism,** which is an economic system based on mispricing, externalities, and false information. Without the systems of deception like accounting fraud and tax havens, I suspect much of their ‘wealth’ would prove phantom: they have not actually created anything (not services, not systems, not products) to justify the kinds of pay packages we’ve seen reported. Their wealth is primarily a function of tax laws, control of capital, and legal maneouvers: it is manipulation, not creation. There is no reason for the tax code to grant this any sort of privilege.

    A lot of the conservative critique of the Buffett Rule seems to be an attempt to deflect away from serious economic problems — among which, various forms of lying, self-deception, and fraud are revealed at the core (whether fraudclosure, or credit derivative swaps, or Romney’s tax havenry and offshoring accounting tricks). But the conservatives don’t want to talk about financial manipulation: they want to restrict all commentary to ‘the tax code’ and thereby shrink the conversation and suffocate any genuinely productive economic conversation.

    On Jan 16, 2012, ‘Morning Joe’ Scarborough commented to the effect that Gingrich was completely out of bounds to discuss the *nature* of Romney’s version of (financialized, Free Market) capitalism. Joe drew a line rather publicly in the sand; he stated that it was ‘okay’ to talk about ‘the tax code’, but to actually discuss the nature of financialized ‘free market’ (tax haven enabled) capitalism was absolutely verbotten for the GOP and/or libertarian conservatives.

    To me, only a very small part of this Buffett Rule conversation is about (social) fairness. The more interesting part should be about truth, honesty, transparency, and integrity. Those are all factors that contribute to economic prosperity, but it’s been a few generations since we had that conversation in America.

  7. Tom in MN says:

    I agree with Robert Reich, 30 percent is too low:

    This country made itself great with much higher tax rates and we have been living off those investments (think national interstate highway system) ever since. It’s time we all paid to maintain them.

    My Big State U has $2B in deferred maintenance. Our building, that has third floor class rooms, in the last two years just got fire alarms and an enclosed stairwell. What part of this makes us the greatest nation on earth?

  8. steve says:

    when you think about, what does Buffet gain from this? If he taxes all who make over 1mm, a lot of Buffet’s smaller competitors will be less competitive in the market. The way it seems to me, is that all the billionaires that have very close ties to big government want to use this “tax the rich” nonsense to eliminate smaller competition and become even wealthier themselves.

    Warren Buffet is pretty close with Obama. The amount of insider trading committed by Buffet over the last 50 years would probably boggle one’s mind. It’s just a little too good to be true for billionaires to come our in loving arms. Billionaires’ main competition comes from smaller millionaires who are more efficient or provide better products. Taxing them is one of the most effective methods of reducing their production capacity and increasing barriers to entry. More capital will be moved overseas and along with that more jobs. It’s going to be a lose-lose for everyone except Obama, Buffet and a few other big government cronie capitalists. Epic Failure!

    • Chigliakus says:

      This is amusing. So enlighten us, what superior products or efficiencies are millionaire investors providing over billionaire investors like Buffett? Small business owners aren’t taking home seven figure paychecks, most of their profits are reinvested into their business. Most earn a middle or upper-middle class salary. Millionaire Wall Street investment bankers are just as parasitic on society as their billionaire brethren, they just siphon off less of society’s productive output than the big guys. They’re nothing like small business owners.

  9. Fred Donaldson says:

    The Buffett Rule will be the excuse for continuing the Bush tax cuts for the wealthy, and will have little consequence to folks who incorporate themselves or use trusts and hidden bank accounts.

    While I can understand concern about Bermuda (which has a very nice aquarium), the problem might be more sizeable in some of the bigger economies, like Switzerland. For the very rich, income is not as meaningful as assets, which are not taxed, and without a higher estate tax, that retained income can pass through (with tax engineering) at low tax rates to next generations.

    Having watched a CEO and CFO of a floundering company each drive business-leased $100,000 Mercedes and drink business-event $300 bottles of wine, I am sure that the wealthy will not suffer from a minimum tax, but it might spur some coporate boards to lower high salaries when the recipients only get 30% of it.

  10. jeff young says:

    BUFFETT (Buffett Uber Fair Flat Everybody Taxed 30%) Tax has 3 parts:

    1. Classical Buffett Tax – 30% minimum on all income over 1 million
    2. Buff Tax – 30% minimum on hot sexy buff (but poor) celebraties and posers
    3. (All You can eat) Buffet Tax – 30% for everybody else, even those on SSI/SSD

    Thus the Democrats can increase spending while the Republicans (who represent taxpayers) can recruit more voters and in a few years reduce both the debt, the spending, and eventually the 30% AMT rate (in all 3 parts) to 20%, thus letting all tax payers (including secretaries) pay as little as Obama and Buffett paid on 2011 income.