'Buffett Rule' not a serious response to budgetary problems

Pete Souza/White House

President Barack Obama meets with Warren Buffett, the Chairman of Berkshire Hathaway, in the Oval Office, July 18, 2011.

Article Highlights

  • BuffettRule advocates contend that millionaires pay lower federal tax rates than the middle class, a claim contradicted by the data

    Tweet This

  • Americans in the middle of the income distribution paid only 12.6%of their income in federal taxes

    Tweet This

  • BuffettRule targets millionaires who earn long-term capital gains but leaves unscathed those who earn municipal bond interest

    Tweet This

The "Buffett Rule's" stated goal of making millionaires pay the same tax rates as the middle class is appealing. Unfortunately, the proposal is based on inaccurate claims about the tax system and its enactment would penalize the investment that fuels long-run economic growth.

Some Buffett Rule advocates contend that millionaires typically face lower federal tax rates than the middle class, a claim squarely contradicted by the data. The Urban-Brookings Tax Policy Center reports that Americans with incomes above $2 million (the top 0.1 percent) paid 32.1 percent of their income in federal income, payroll, and other taxes in 2011. Meanwhile, Americans in the middle of the income distribution paid only 12.6 percent of their income in federal taxes.

"Some Buffett Rule advocates contend that millionaires typically face lower federal tax rates than the middle class, a claim squarely contradicted by the data." - Alan D. ViardThe Obama administration admits that "the United States has a progressive tax system" and that "on average, high-income Americans do pay more" tax than middle class Americans. The administration says that the Buffett Rule is not aimed at average millionaires, but at those with unusually low tax bills. Of course, even those millionaires are likely to be paying more than the 12.6 percent paid by the middle class, if not the 30 percent demanded by the Buffett rule.

In any event, the proposal's focus is surprisingly selective. The Buffett Rule primarily targets millionaires who earn long-term capital gains, which are slated to face a 20 percent tax rate next year, but leaves completely unscathed those who earn municipal bond interest, which faces a zero tax rate.

The proposal's focus on capital gains is dubious economic policy. A significant portion of capital gains arise from the reinvestment of corporate profits on which corporate income tax has already been paid. For those gains, the special 20 percent income tax rate mitigates the double taxation of corporate investment and dampens the artificial tax incentive for excessive corporate debt. It would be a mistake to hike taxes on those gains, either directly or indirectly through the Buffett Rule's convoluted minimum tax.

The resolution of the long-term fiscal imbalance facing our nation is likely to include tax increases on the rich. But, as commentators across the ideological spectrum recognize, raising taxes on the rich will not be sufficient to close the fiscal gap. Entitlement cuts and more broadly based tax increases will also be necessary. Increasing investment taxes on a small group of millionaires is a political gesture, not a serious response to the budgetary challenge.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

What's new on AEI

image Recovering from tax time blues
image 10 welfare reform lessons
image Let HHS nominee Sylvia Burwell explain Obamacare lie
image Why bold ideas backfire in politics
AEI on Facebook
Events Calendar
  • 14
    MON
  • 15
    TUE
  • 16
    WED
  • 17
    THU
  • 18
    FRI
Wednesday, April 16, 2014 | 10:00 a.m. – 11:00 a.m.
Calling treason by its name: A conversation with Liam Fox

Join us at AEI as the Right Honorable Liam Fox sits down with Marc Thiessen to discuss and debate whether America’s intelligence agencies have infringed on the personal privacy of US citizens.

Event Registration is Closed
Thursday, April 17, 2014 | 4:00 p.m. – 5:00 p.m.
The curmudgeon's guide to getting ahead

How can young people succeed in workplaces dominated by curmudgeons who are judging their every move? At this AEI book event, bestselling author and social scientist Charles Murray will offer indispensable advice for navigating the workplace, getting ahead, and living a fulfilling life.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.