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Everything you know about the Buffett rule is wrong

at 01:29 PM ET, 04/11/2012


President Obama presents a 2010 Presidential Medal of Freedom to Warren Buffett in February 2011. (Carolyn Kaster - AP)
“It’s simple,” the president said on Tuesday. “If you make more money — more than $1 million a year, not if you have $1 million, but if you make more than $1 million a year, you should pay at least the same percentage of your income in taxes as middle-class families do.”

And that is simple. But it’s not how the Buffett rule actually works.

When President Obama says that “this vote is coming up,” he means that the Senate is planning an April 16 vote on Sen. Sheldon Whitehouse’s “Paying a Fair Share Act.” This is the bill that actually enacts the Buffett rule. But it doesn’t do exactly what Obama says the Buffett rule does. Here’s Whitehouse explaining the legislation to me:

We’ve adapted the bill to have a phase in between one and two million. So you pay a portion of the tax the Buffett rule adds as you go up the line between one and two million and it doesn’t kick in fully until you get to two million.

EK: So if it’s not 30 percent, what’s the minimum effective tax rate someone making $1,000,001 would pay?

SW: It’s hard to do the math on that because it would be highly specific to their situation. If they were paying 18 percent now, and if they only went over one million by one dollar, they would be 18 percent plus one one-millionth of the Buffett rule adjustment. And if they were one dollar short of two million, they would pay the full 30 percent minus one one-million of the full adjustment. So there’s a ramp.

In other words: The “Paying a Fair Share Act” doesn’t mean someone making $1,500,000 will pay at least the same percentage of his income in taxes as the average middle-class family. It means he would pay a somewhat higher marginal rate on the income he earns over $1 million — in this case, on the excess $500,000.

Moreover, that higher marginal rate would only reach 30 percent on income over $2 million. Between $1 million and $2 million, the Buffett rule phases in so as to avoid a sharp “tax cliff” at the million-dollar mark.

Another misconception: The proposal doesn’t raise $47 billion over 10 years. Or, rather, it does, but only if you use the “current law baseline” that assumes the full expiration of the Bush tax cuts. No one really uses that baseline. If you look at Paul Ryan’s budget, for instance, its appendix tables use a “current policy baseline,” which assumes, among other things, that the Bush tax cuts are extended.

Compared with that baseline, the Paying a Fair Share Act actually raises about $160 billion. Still not enough to solve our deficit problems on its own, but nothing to sneeze at.

 
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