Why We Need a 'Buffett Rule' (For Now)

President Barack Obama awards the Medal of Freedom to Warren Buffett in the East Room of the White House. Credit: Bill O'Leary/The Washington Post via Getty Images

Face it, America.  We’ve got an overly complex, unfair, inefficient federal tax code.  It’s riddled with loopholes, it’s opaque and confusing, it’s less progressive than it used to be, and it doesn’t raise enough revenue to pay for the government most of us want and all of us need. We should scrap it and start over.

But that’s not going to happen for awhile, so until then, we should have a Buffett Rule.

This is the very simple idea named for billionaire investor Warren Buffett, who thinks taxes on the wealthy are too low  that if you’ve got at least a million bucks in taxable income, your tax rate should be no less than 30 percent.  Boom … that’s it.  No special tweaks.  No exceptions.

Just how broken is the tax code in this regard?

• In 2009 (most recent data), 22,000 millionaire-and-up households paid less than 15 percent in federal income taxes, and about 1,500 paid nothing.

• The 400 richest Americans, with average incomes over $100 million, paid 18 percent in federal income tax.

• These average tax rates have fallen sharply over the years, due to cuts in tax rates, particularly those of asset-based incomes, like capital gains.  According to the White House’s release today, "the wealthiest 1-in-1,000 taxpayers pay barely a quarter of their income in Federal income and payroll taxes today – half of what they would have contributed in 1960."

• Rich people spend a lot of time and resources figuring out ways to exploit all the loopholes that favor capital income, income earned abroad, income borrowed against your stock holdings, and so on. That’s one reason why the profits of U.S. foreign companies are about 550 percent of GDP in the Cayman Islands, 350 percent in the British Virgin Islands, and 650 percent in Bermuda.  Those numbers are flat-out ridiculous.

Obviously, such a rule is about fairness.  But it’s also about taking inefficient distortions out of the tax code.  Perhaps if those with these kinds of resources – and remember, we’re talking about households who reside within the top half of the top income percentile – spend less time tax planning they can spend more time doing actual productive stuff.

Two more points:  First, there’s an argument I’m hearing today that we shouldn’t bother with the Buffett rule because it would reduce the deficit only a little bit.  That’s BS – and I don’t mean Bowles-Simpson.  That’s like an overweight person saying that since he can only exercise for 10 minutes today, he might as well just go have an ice-cream cone instead.

Any time we can close a tax loophole and generate both more fairness and any level of fiscal improvement we should do so.  And according to the official scorekeepers, compared to the revenues we expect to collect under current law, with the Bush tax cuts sunsetting as planned at the end of this year, it raises about $50 billion.  Compared to current policy – if we leave the tax cuts stay in place – it raises $160 billion.  Either way, that’s real money.

Second, below is a useful, albeit somewhat complicated graphic.  It shows the distribution of tax rates for various middle and high-income folks.  What you see here is that the typical middle-income household pays about the same federal income tax rate (13 percent), as 10 percent of millionaires ($1-10 million, 15 percent), multi-millionaires ($10-100 million, 14 percent), and multi-multi-millionaires ($100 million +, 12 percent).  

So, yeah … I’d say that until we can overhaul our tax code, we need the Buffett rule.

Cross-posted from jaredbernsteinblog.

You can email me at info@jaredbernsteinblog.com. I look forward to your feedback.

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. From 2009 to 2011, he was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.

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