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Posted at 12:08 PM ET, 11/01/2011

The Buffett tax


Consider now the Buffett Tax. You recall the Buffett Rule, as coined by famed investor Warren Buffett: America’s wealthiest people shouldn’t pay a lower tax rate than do middle-class Americans. Seems common sense. Buffett reported his tax rate at 17.4 percent, lower than anyone else in his office. But how could we implement the Buffett Rule and, if we did, what would be the consequences?

People in Buffett’s office — with incomes ranging from $60,000 to $1 million — have tax rates in the low 30s, he says. Here’s my proposal: Impose a sliding tax rate on incomes above, say, $1 million that would boost the average tax rate to perhaps 30 percent. This would close the gap between what Buffett calls the “ultra rich” and any definition of middle class. Among those with incomes of $100,000 or less, the median federal tax rate is about 18 percent, a study from the Congressional Research Service found. For those with incomes from $100,000 and $250,000 (for couples), the median tax rate is 25 percent. Above that, the median rate is about 30 percent.

But the ultra rich pay much less. Among the richest 400 Americans, the average tax rate in 2008 was 18 percent, according to the Internal Revenue Service. A main reason: The ultra rich hold a disproportionate share of stocks, whose dividends and capital gains (profits on sales) are taxed at a maximum rate of 15 percent. Under my proposal for a Buffett Tax, all this income would be subject to the sliding surtax.

What would be the consequences? For starters, I doubt it would much harm economic growth. After the Tax Reform Act of 1986, tax rates on earned income (mostly wages and salaries) and unearned income (including dividends and capital gains) were the same. The ultra rich paid higher taxes then. The economy didn’t seem to suffer.

But neither would a tax like this dramatically shrink budget deficits. Buffett hasn’t proposed a specific tax, but he warns against exaggerated expectations. “It doesn’t solve our budget problems,” he’s said. “What I suggest would probably raise about $20 billion annually from about 50,000 people.” By contrast, the deficit in fiscal 2011 was $1.3 trillion.

My proposal differs from one by Senate Majority Leader Harry Reid, who would impose a 5.6 percentage point surtax on incomes exceeding $1 million. Reid’s approach, though raising somewhat more money, would increase taxes on some wealthy taxpayers already facing high rates. About half of those with incomes exceeding $1 million already have tax rates exceeding 30 percent. Higher taxes could discourage job creation, because some of these taxpayers are small-business owners. Meanwhile, people like Buffett would remain relatively lightly taxed. Adding 5.6 points to his 17.4 percent rate puts him at 23 percent.

The injustice pointed out by Buffett is so glaring that it cries out for correction. Sadly, not much is likely to happen. Republicans oppose any tax increase, no matter how sensible; Democrats seem more intent on punishing the rich simply because they’re rich. It would be healthy for everyone to return to the 1986 tax reform with lower top rates and no preferential rates for capital gains and dividends. The idea was to simplify the system and minimize business decisions made for tax reasons. On taxes, it should be back to the future.

By  |  12:08 PM ET, 11/01/2011

 
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