On the heels of President Obama’s State of the Union address, Senate Democrats introduced new legislation based on the “Buffett Rule.” The “Paying a Fair Share Act” would implement a 30 percent minimum tax for the nation’s millionaires.
While members of the top tax bracket pay a rate of 35 percent, some top earners pay far less than that. According to a report by the Congressional Research Service, about a quarter of all millionaires pay a smaller percentage in taxes than middle income households do. This happens because the capital gains tax (the tax on sales from stocks, bonds, property, and commodities) is only 15 percent, far lower than most taxpayers’ income tax rates. For individuals who make most of their income from investments, their effective tax rate may be close to 15 percent regardless of how much they earn, causing many leading figures to question this rule’s fairness.
This is true of the policy’s namesake, Warren Buffett, Berkshire Hathaway CEO and the world’s third-richest man. In August, Buffett published an Op-Ed in the New York Times, chiding Congress for allowing him to pay a lower tax rate than his secretary. President Obama took up the same rhetoric shortly after, unveiling a form of the the “Buffett Rule” in the American Jobs Act in September.
Opponents of the 30 percent minimum tax have been quick to label it as “class warfare,” arguing that the policy is a political move intended to distract voters from the poor economy and that it unfairly targets “job creators.” Senator Sheldon Whitehouse (D-RI), the bill’s sponsor, said the bill makes the tax code fairer, stating in a press release that it is “inexcusable that our tax system permits ultra-high income earners to pay a lower tax rate than a truck driver or a janitor.”
Public opinion polls show widespread support for the Buffett Rule. According to a United Technologies-National Journal Congressional Connection poll, 76 percent of Americans support the 30 percent minimum tax on millionaires.
Mitt Romney, who released his tax returns after pressure from fellow Republican nomination contenders, showed that after deductions the former Massachusetts governor paid an effective tax rate of just 13.9 percent in 2010, despite earning $20.9 million that year, because most of that income was from investments. When Gov. Romney secures the GOP nomination, there is little doubt that he will become the poster boy of the need for the Buffett Rule in President Obama and congressional Democrats’ campaigns.
While the Buffett Rule is a good start to tax reform, deficit reduction, and addressing income inequality, it is largely symbolic and highly political. According to a report by Citizens for Tax Justice, a left-of-center tax policy think tank, the 30 percent minimum tax on millionaires would affect just .08 percent of the population. That’s 8 percent of the top 1 percent of all income earners. The rule would generate $50 billion in revenue annually, hardly a dent in the $1.3 trillion deficit the Federal government is expected to run this year. Still, passing this legislation would show that Congress is serious about addressing the three challenges mentioned above. Perhaps just as importantly, it will show that Congress has the middle class’s interest in mind and provide a much-needed public confidence boost to Congress, which, after another drop, now has an approval rating lower than Paris Hilton. (I was hoping my article from two weeks ago would improve Congress’ approval rating, but I guess not.)
House Republicans, who have vehemently opposed all tax increases, may soon find themselves backed into a corner. With public opinion behind the Buffett Rule, and with the expiring Bush tax cuts as a political lever, Senate Democrats and President Obama may have some firepower behind this piece of legislation. It has become clear that the GOP’s spending-cuts-only approach to the deficit is not a politically tenable one. In deciding to hammer President Obama on government spending, the deficit, and how to pay for it, Republicans have opened up a policy debate about fairness and equality that they may not win.
Here is an interview with Sen. Sheldon Whitehouse, the bill’s sponsor, by Washington Post reporter Ezra Klein on just how the Pay a Fair Share Act will work.