Senate Democrats, and likely the White House, are resurrecting the Buffett Rule tax as part of their budget package to replace the looming across-the-board sequester. Team Obama has a flashy web site devoted to the idea, but bells and whistles can’t cover up with a truly bad bit of public policy it is. In the name of “fairness,” it exacerbates one of the worst aspects of the current US tax code, its anti-investment bias. The Buffett Rule, at least in its most well-known incarnation, effectively would raise investment tax rates to 30% from their current 20% (not counting the 4% ACA healthcare reform tax). AEI’s Alan Viard:
The Buffett Rule primarily targets millionaires who earn long-term capital gains … 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.
I offered a broader critique of the Buffett’s rule last April that I think is worth reading.