As a continuation of President Obama’s jobs proposal (economic stimulus) for curbing spending and increasing federal government revenue, the administration is taking a cue from famous investor, Warren Buffett. On many occasions, Buffett has claimed that wealthy Americans do not pay a fair share of the tax burden relative to their means to do so. In his famous example, Buffett describes his effective tax rate as being lower than his secretary’s.
Many wealthy people earn income through investing returns, not ordinary income, which are taxed at a rate of 15 percent rather than a marginal rate schedule with a maximum of 35 percent in 2011.
Critics of Buffett’s outspoken desire to reform the tax code say that Buffett can help reduce the deficit by donating a portion of his net worth to the U.S. Treasury, as the government allows for such donations. Those who feel that Buffett’s comments, if they influence policy, could hurt them today or in the future say that Buffett could voluntarily not take deductions that lower his tax liability, but like a good capitalist, Buffett will continue to take advantage of every avenue the tax code provides his for saving money.
Economists have crunched the numbers to show that tax law changes fashioned after Buffett’s statements would not raise enough revenue to cover the gap between government spending and revenue, but there doesn’t seem to be any implication by the plan’s supporters that this would be the case; cutting back cable television service won’t allow a poor family to afford a house, but it’s still a beneficial change.
People who once respected Buffett’s investing prowess now call him a socialist, despite the fact he’s one of the most successful capitalists the modern world has seen. I have no interest in defending Buffett’s philosophies, but he is a literal capitalist, as through his company Berkshire Hathaway he provides the means in the form of capital for other companies to thrive. Like a good capitalist, Buffett invested $5 billion in a struggling bank, with conditions only he could negotiate, such as a significant discount on the investment and influence among management for operational decisions.
To take advantage of Warren Buffett’s name, the president is informally calling his tax-related measures the “Buffett Rule.” If I were Warren Buffett, I wouldn’t my name attached to a politically-charged discussion even if I believe in the core aspects of the proposal. Buffett doesn’t mind that his name is being used in such a manner and is publicly supporting the measure.
What’s included in the Buffett Rule
Simply put, the Buffett Rule is a minimum tax on taxpayers with an income over $1 million. This would replace the misdirected Alternative Minimum Tax (AMT). The original purpose of the AMT was similar: wealthy households should pay a fair share of taxes. Over time, though, as the income range for middle class grew, the AMT was not automatically adjusted. The AMT began to hit an increasing number of families who would not consider themselves wealthy.
In addition, the Buffett Rule would limit the tax deductions available to families in this income range and end subsidies to major corporations such as oil companies.
Another key to the revenue portion of Obama’s proposal is to let the tax cuts enacted under President Bush expire for couples with incomes over $250,000. That’s not necessarily part of the Buffett Rule, and the proposal has been making the rounds since at least the beginning of Obama’s presidency.
A Congress unfriendly to tax increases will make passage of the Buffett Rule difficult. Wealthy families believe they are already paying their fair share of the tax burden and want to see low-income families pay more. According to the U.S. Census, the gap between the top and the bottom of the income scale has expanded to its widest point in history, and a situation in which both the rich and the poor feel the government unfairly discriminates against them will not lead to a solution.
The desired outcome in this case would be enough revenue to cover the government’s obligations plus the feeling among the systemically lower class that they have a fair opportunity to succeed and a feeling among the wealthy that they have an obligation to pay for a representative bulk of the country’s expenses.
Photo: Aaron Friedman
Updated September 20, 2011 and originally published September 19, 2011.