President Obama and Senate Democrats will kick off a coordinated pressure campaign on Republicans next week ahead of a tax day vote on legislation to enact the president’s “Buffett Rule,” which would ensure that the rich pay at least 30 percent of their income in taxes. … “Making sure that everyone plays by the same set of rules is key to ensuring the economic security of the middle class,” said Amy Brundage, a White House spokeswoman, “and the president will continue to make this case next week.”
Now I would say that an economy a) capable of growing at least as fast as its historical average and b) not facing a deluge of debt is what’s really “key to ensuring the economic security” – and prosperity! — of the middle class. Not sure that the Buffett Rule really does much in this regard.
Actually, I’m not sure what the Buffett Rule accomplishes other than to give the Obama campaign a populist political cudgel with which to bash Mitt Romney.
Would the Buffett Rule tax raise much money? No, it wouldn’t. According to Congress’ official tax analysts, a Democrat bill designed to enact the tax would generate just $31 billion over the next 11 years. And that’s assuming crafty tax lawyers can’t figure out some new ways to hide that income, meaning less tax revenue. Of course, a simple way of doing this is to simply not realize capital gains. As e21 points out:
The higher the tax rate, the more powerful the incentive to avoid realizations. A “Buffet rule” or similar device to increase the capital gains tax rate on the top 1% would lead to economically damaging “lock-in effect,” where capital is not allocated to its most efficient use because of the tax disincentive to liquidate an existing investment. (A related issue is the elaborate tax-planning schemes where some investors use derivatives to replicate a sale without triggering tax liability.)
Would the Buffett Rule tax really make the tax system more progressive? Not so much. According to the Tax Policy Center, “middle-income households, on average, will pay 2015 taxes totaling about 15% of their income (using the legislation’s definition). Without the Buffett rule, more than 99 percent of millionaires will pay more than that and only about 4,000 will pay less. Barely 10 percent of them will pay less than 20 percent.” As it is, the total average effective tax rate—including payroll taxes—for the top 1 percent is already 30 percent vs. just 12.6 percent for the middle 20 percent. In fact, the top 0.1% pay 32.1% vs. 0.8% for the bottom 20%.
Also, taxpayers who only pay the 15% capital gains/dividend tax aren’t really just paying a 15% rate. That income is actually double taxed, first at the corporate level and then at the individual level. Indeed, a new report from Ernst & Young found that the current top U.S. integrated dividend tax rate is 50.8 percent—which will rise to 68.6 percent in 2013—while the 50.8 percent integrated capital gains tax rate will rise to 56.7 percent in 2013. So the whole premise of the Buffett Rule — that some group of superwealthy Americans are paying some minimal tax rate — is false.
Would the Buffett Tax rule make the economy stronger? No, it wouldn’t. The Buffett Rule tax would move the tax code further away from the necessary goal of eliminating its bias against investment and toward consumption. Economic simulations have repeatedly indicated that replacing the income tax system with a consumption tax would boost economic growth. Even without the Buffett Rule, the expiration of the Bush tax cuts and new taxes under Obamacare would raise taxes on capital gains to 24% and dividends to 45%, triple today’s rate. Of course, just last year, the Obama administration noted in its budget that the lower dividend rate “reduces the tax bias against equity investment and promotes a more efficient allocation of capital.”
Instead of reforming the tax code, the Buffett Rule would deform it further.