Buffett Rule could hit 25% of the very rich

@CNNMoney October 13, 2011: 3:58 PM ET

NEW YORK (CNNMoney) -- A quarter of millionaires don't pay enough in federal taxes to satisfy the Buffett Rule, according to a new study from the Congressional Research Service.

Billionaire investor Warren Buffett has made a big deal of how much less many ultra-rich pay in federal taxes as a percent of their income than the middle class. So much of a big deal, in fact, that President Obama proposed the Buffett Rule.

The Buffett Rule is a guiding principle for tax reform to ensure that millionaires pay a higher percentage of their income in federal taxes than those who make less.

The CRS found that 94,500 millionaires pay an effective federal tax rate that is less than that paid by 10.4 million moderate-income taxpayers.

That is, 25% of those with adjusted gross incomes over $1 million pay a smaller portion of their income in federal taxes -- income, payroll and corporate -- than 10% of those with AGIs below $100,000.

There are two key reasons why a millionaire or billionaire may end up paying a lower percentage of his income than the average American: A lot of his money may come from investments, which are taxed at a lower rate than wages, and he may not pay very much in payroll taxes since they are only assessed on wage income, which could be a small share of his total income.

The CRS report also analyzed arguments that critics of the Buffett Rule make.

Critics of higher taxes, for instance, often assert that small businesses are the source of the greatest job creation, and so raising rates on small business owners would be bad for the economy.

The report notes, however, that recent studies have found that "small businesses contribute only slightly more jobs than larger businesses relative to their employment share." And that difference is attributable to hiring by startups, which also end up destroying about 40% of the new jobs they create within five years when the businesses flame out.

Furthermore, the CRS report said, "most small business owners of startup firms are not in the top income categories and would not be affected by tax policies that observe the Buffett Rule."

Buffett Rule: Not so simple

More broadly, the report noted that only about 1% of all federal tax returns that report business income have AGIs over $1 million. And of those, only a quarter appear to pay tax rates that would violate the Buffett Rule.

"[That] suggests that tax reform policies designed to ensure adherence to the Buffett Rule will affect few small businesses," the CRS report said.

The debate over how much to tax millionaires and billionaires is far from over, as Congress faces the prospect of having to reduce deficits by trillions of dollars in the coming years.

Buffett this week tried to advance his campaign to get lawmakers to "stop coddling" the super-rich as they contemplate the sacrifices Americans should make in the quest to put the country on a more sustainable path.

In a letter to Republican Rep. Tim Huelskamp Tuesday, Buffett revealed new details about his income and tax burden, and reiterated his promise to release his federal tax return if his ultra-rich peers did the same. To top of page

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