Buffett Rule: Not ready for prime time

@CNNMoney April 16, 2012: 1:32 PM ET
Obama's Buffett Rule for taxes: Not ready for prime time

Obama's proposed "principle" to ensure the wealthy pay their fair share in taxes is intended for tax reform. But some Senate Democrats want to enact it sooner.

NEW YORK (CNNMoney) -- The Buffett Rule makes for great stump speeches in an election year. But as tax policy it leaves much to be desired.

First proposed by President Obama last year, it's intended to ensure that people making more than $1 million a year pay a higher share of their income in taxes than middle class households.

The president has even specified that he wants the rich to pay at least 30% of their income in taxes.

But the administration, in putting forth Obama's budget this week, made clear that they are not pushing to implement the Buffett Rule now. Rather, it's a guiding principle for when -- if -- Congress takes up tax reform.

But several Senate Democrats don't want to wait. They introduced a bill earlier this month that seeks to apply the Buffett Rule to today's tax code "as an interim step [to tax reform] that can be done quickly," according to the legislation.

The "Paying a Fair Share Act" would apply to anyone whose adjustable gross income exceeds $1 million. Those who itemize their deductions would get a credit equal to the value of their charitable contribution deductions, so as not to discourage charitable giving.

To measure whether a millionaire is paying at least 30% of his income in taxes, the bill would take into account what the individual paid in federal income and payroll taxes plus the new 3.8% Medicare surtax that goes into effect in 2013.

Under the parameters set by the bill, 217,000 millionaire households in 2015 would end up owing an average of $190,000 more in taxes than they pay today, assuming no behavioral changes, the Tax Policy Center estimates. That could boost revenue by as much as $41 billion that year.

But here's the thing: Even without a Buffett Rule in place in 2015, nearly all millionaires would already be paying more in taxes as a percentage of their income than those in the middle class, Roberton Williams, a senior fellow at the Tax Policy Center, noted in a TaxVox blog post.

He estimates that middle-income households on average would pay 15% of their income in taxes, using the bill's parameters, while 99% of millionaires would pay more than that. And that vast majority of that 99% would pay an effective tax rate of 20% or higher.

Moreover, by creating a 30% threshold that the wealthy must meet, the Buffett Rule means high-income households would need to calculate their taxes three times -- once under the regular code, once under the Alternative Minimum Tax and once under the Buffett rule.

"The proposed legislation would certainly raise taxes on a lot of high-income taxpayers. But the price would be an even more complicated tax code. There are better ways to raise taxes on the rich," Williams noted.

In his budget, Obama does call for the Buffett Rule to replace the Alternative Minimum Tax entirely. That would be simpler than adding it on top of the AMT.

But it almost certainly would create a new revenue problem. That's because the AMT is projected to raise a ton of revenue -- roughly $2 trillion over 10 years, give or take a few billion. So until someone figures out how to clone rich taxpayers, it's unlikely the revenue generated by the Buffett Rule could match it.

Moreover, Williams noted, if tax reform is done right there shouldn't be a need for a Buffett Rule, an AMT or any other accessory to the tax code.

The only reason policymakers call for such measures is when they don't like the outcomes of the system they've got. Tax reform is their chance to design a better system. And if one goal is to tax the rich more, they can do that in a simpler, more effective way than the Buffett Rule. To top of page

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