The U.S. Senate will vote today on the so-called Buffett Rule, which attempts to ensure that Americans with millions of dollars of income at least pay taxes at the same or higher rate as do most middle-class taxpayers.
The first question to be asked is whether the proposed solution addresses a real-life problem. Is the Buffett Rule some liberal fantasy dreamed up to feed class warfare, or do a significant percentage of wealthy Americans really pay a lower tax rate than do their secretaries?
Here’s what the Congressional Research Service found in a study last year:
“Interestingly, 65% of rich taxpayers (i.e., taxable income over $1 million) — about 200,000 taxpayers — face a tax rate lower than the median tax rate of moderate-income taxpayers. The primary reason for this is the higher-income taxpayers with low tax rates receive a very high proportion of the income from long-term capital gains and qualified dividends, which are taxed at low tax rates and not subject to payroll taxes. Lower-income taxpayers with relatively high tax rates receive most of their income from wages, which are subject to payroll taxes.”
So within the very small group of people with annual incomes of more than a million dollars, the situation is far from rare. The classic example of that phenomenon is Mitt Romney, who in 2010 paid an effective total tax rate of 13.9 percent and in 2011 paid an estimated 15.4 percent.
The next question is how much additional revenue the Buffett Rule might be expected to generate. There are at least two different ways of answering that question.
If you believe that the Bush-era tax cuts will be allowed to expire as scheduled at the end of the year, then passing the Buffett Rule would raise an additional $47 billion over the next 10 years. Not a lot, but something.
However, if you believe as most experts do that the Bush-era tax cuts will NOT be allowed to expire, then the Buffett Rule would raise a more substantial $160 billion over the next 10 years.
Third, would such a tax increase on some of the richest of Americans have a negative impact on the economy? Republican critics of the proposal argue strenuously that it will hurt small businesses and reduce employment.
Analysis by the Congressional Research Service says that is untrue. First, just 1 percent of taxpayers who report business income also report income of greater than a million dollars. Of that tiny number, most would not be affected by the Buffett Rule because they already pay a relatively high tax rate. The Buffett Rule would mainly affect those whose major source of income is capital gains and dividends.
“The small share of taxpayers with small business income in the millionaire category suggests that tax reform policies designed to ensure adherence to the Buffett rule will affect few small businesses” and also would not affect employment levels, the CRS found.
Republicans also complain that the Buffett Rule is little more than political grandstanding because it will never become law and is no substitute for a serious, concerted effort to bring our deficit and debt under control.
On that point, they are absolutely, 100 percent correct.
Bringing our deficit and debt under control would require compromise. It would require substantial spending cuts from defense, entitlements and other programs, along with across-the-board tax increases. Focusing on the rich and only the rich cannot solve this problem for us.
In fact, the single biggest driver of our current deficit remains the Bush-era tax cuts. If we simply returned to Clinton-era tax law, the projected deficit in 2015 would be cut by more than half, according to the Congressional Budget Office.
But as we know, that isn’t going to happen, and the likely defeat of the Buffett Rule illustrates why. In a political environment in which it is impossible to approve a tax hike on one tenth of 1 percent of taxpayers — the richest one tenth of 1 percent — it would be political suicide to champion a broader tax hike.
As a result, we are left to choose between Democrats who propose to raise taxes slightly on those already doing quite well and Republicans who propose to cut taxes even further, especially for those already doing well. While passing those tax cuts, the GOP would also gut programs that provide a modicum of economic security for the rest of America.
Put another way, it’s a choice between those who want to put a Band Aid on a gaping wound and those who reject the Band Aid and want to bleed the pallid patient even more.
– Jay Bookman