In both the State of the Union Address and the Fiscal Year 2013 Budget, President Obama called for implementation of the “Buffett Rule,” which would require very high income earners—people making $1 million a year or more—to pay at least 30 percent of their adjusted gross income in federal tax. This would ensure that millionaires and billionaires do not pay a lower effective tax rate than middle-income people.
The Paying a Fair Share Act of 2012 (S. 2059), introduced by Senator Sheldon Whitehouse (D – RI), essentially seeks to make the Buffett Rule part of the US tax code by requiring millionaires and billionaires to pay a minimum of 30 percent of their income in taxes, with a phase-in for incomes between $1-2 million. The Senate will vote on S. 2059 on Tax Day, April 17. Representative Tammy Baldwin (D-WI) has introduced a counterpart to S. 2059 in the House, H.R. 3903, although the House currently has no plans to vote on it.
The Buffett Rule is named for Warren Buffett, the billionaire investor from Omaha who argues that people with very high incomes pay too little in taxes. He cites himself as an example, noting that he pays a lower effective tax rate than his secretary.
There are two primary reasons why multi-millionaires such as Buffett, who live off of profits from investment income, end up paying less in taxes. First, capital gains and stock dividends are subject to lower rates than earned income in the personal income tax system. Second, investment income is exempt from payroll taxes (for more, see this Citizens for Tax Justice report).
The Buffett Rule would raise around $25 billion each year after 2012, assuming that the Bush tax cuts expire as scheduled. The substantial increase in revenue raised by the Buffett Rule’s implementation would help the US government address its budget problems, and would affect a very small percentage of people at the top of the income scale. In fact, only 0.1 percent of Americans would end up paying more taxes under the Buffett Rule, and even then, the average tax increase for these wealthy individuals would be only 2.2 percent (see report from the Center for American Progress).
However, some analysts believe that the implementation of the Buffett Rule would lead to a more confusing tax code (for more, see this Tax Policy Center article).
Those seeking a fairer share of tax revenues from upper-income taxpayers favor other proposals in addition to the Buffett Rule. Some advocates favor ending tax preferences for investment income as one of the most effective ways to tax the super-rich. Higher taxes on investment income would raise about $70 billion annually (under the same assumption that the Bush-era tax cuts will expire at the end of 2012). Many advocates also support the President’s proposal to let the Bush-era tax cuts expire at the end of 2012 for any individual making over $200,000, or for joint tax-filers making over $250,000. This proposal would bring in $314 billion more than letting the tax cuts expire only for millionaires. This also means that the two top marginal tax rates for these individuals would return to 2001 levels (from 33 percent to 36 percent and from 35 percent to 39.6 percent), although most households would not actually pay the full rate because of deductions available to them (see the full Citizens for Tax Justice factsheet here). The Buffett Rule taxes adjusted gross income at a minimum level of 30 percent regardless of deductions made, another reason why advocates believe that these two proposals are consistent with each other and should both be enacted. The Buffett Rule, if made law, would be one step forward in the progressive tax reform that many advocates wish to see.