Back in the fall, Obama introduced a plan to make sure that rich Americans pay taxes at at least the same rate as middle class earners.
Now, the so-called “Buffet Rule” is back — Obama has been pushing his proposal on the campaign trail this week, and a bill going before the Senate next week could turn it into law. But what is it, and how would it work? Here’s a refresher.
What is the Buffett Rule?
The Buffett Rule is a proposal from the Obama administration to keep millionaires and billionaires from paying federal taxes at a lower rate than middle-class people.
The initial proposal would have made people who earn $1 million or more per year in wages and investments pay at least 30% of their income in federal taxes.
Democrats hope to bring a bill based on the Buffett Rule, the “Paying a Fair Share Act of 2012,” to a vote in the Senate next week.
Where did the idea come from?
In August of last year, famed investor Warren Buffett wrote an op-ed in The New York Times saying that it’s time to raise taxes on the highest earners.
To illustrate his point, he revealed that, though he’s a billionaire, he pays 17.4% of his taxable income in federal taxes — a lower rate than anyone else in his office.
The Obama administration responded with a proposal for the Buffett Rule a month later.
How would the Buffett Rule affect me?
If you don’t make more than $1 million a year, it wouldn’t have any direct effect on you; your tax rate wouldn’t change.
With the version of the Buffett Rule that’s going before the Senate, if you make between $1 million and $2 million, you’ll pay a higher tax rate than you normally would, but not the full 30% minimum.
Senate Democrats crafting legislation based on the Buffett Rule were concerned that if they introduced a 30% minimum tax for people who make $1 million or more, it would encourage tax evasion — people would be tempted to report a taxable income of $999,999 to shirk the rule. So they decided that a minimum effective tax should be phased in gradually.
If you make over $2 million a year, you would have to pay at least 30% of your income in taxes.
Do millionaires generally pay less in taxes than middle-class people?
No. Overall, millionaires pay a higher percentage of their income in federal taxes than middle-class earners.
But some millionaires do manage to pay a lower federal tax rate than some members of the middle class.
Late last year, a Congressional Research Service study found that 94,500 millionaires (about 1 in 4) pay a lower federal tax rate than 10.4 million moderate-income taxpayers (about 10% of middle-class earners). Those are the people the Buffett Rule would affect.
How is it possible for some millionaires to have lower tax rates than middle-class people?
It’s because long-term capital gains — profits made on the sale of investments that you’ve been holding for over a year, usually stocks, bonds and property — are taxed at a lower rate than other types of income, like wages.
As Warren Buffett put it in his New York Times op-ed, “If you make money with money, as some of my super-rich friends do, your [tax burden] may be a bit lower than mine.”
The Buffett Rule would mainly impact people with a significant amount of capital gains income.
What are the pros and cons of the Buffett Rule?
Supporters of the Buffett Rule see it as a step toward greater economic fairness, and toward making sure the rich contribute their share to bringing down the deficit.
“The average tax rate on high-income people has come down significantly in the last 20 years, even as their income has gone up relative to the rest of the population,” William Gale, co-director of the nonpartisan Tax Policy Center, told the Daily News. “That’s what people are trying to get at when they talk about something like the Buffett Rule.”
As with any proposal to increase taxes on the rich, American Enterprise Institute resident scholar Alan Viard told the Daily News, critics are concerned that the Buffett Rule would give high earners fewer incentives to save and invest — behaviors that grow the country’s overall pot of taxable income.
Critics also note that the Buffett Rule isn’t expected to bring down the deficit that much. The Joint Committee on Taxation estimates that the rule would bring in $47 billion in extra tax revenue over the next 10 years.
That doesn’t seem like much when you consider that the federal government is expected to spend $7 trillion over the next decade.
The Buffett Rule isn’t expected to generate that much extra revenue in part because of a few other tax reform measures Obama included in his 2013 budget plan: dividends would be taxed as ordinary income for people who make more than $200,000 a year, and long-term capital gains would be taxed at 15%, not 20%.
If those reforms also pass, Viard explained, the Buffett Rule won’t end up applying to as many taxpayers.
Economists who support the Buffett Rule’s goals also have concerns about its implementation.
“A good system would be progressive and have high-income households pay more than they currently do, and the Buffett Rule is one way to go there,” Gale told the Daily News. But “the better place to start would be to fix the structural issues in the tax system, rather than to try to glom a particular single change on top of the tax system.”
What’s the Buffett Rule’s current status?
Senate Democrats have crafted legislation based on Obama’s proposal, and they’re hoping to vote on it next week. It’s not expected to advance very far in Congress, but the Buffett Rule should be a recurring theme in Obama’s reelection campaign.
