What is the Buffett Rule Tax Plan and Why Are We Hearing So Much About It?

Warren Buffett has publicly stated many times that he thinks the richest individuals in the United States don’t pay enough in income tax.

He consistently gives the example that he pays a smaller percentage of his overall income in tax than his secretary does.

He’s been so adamant that the Obama administration picked up the baton and ran with it, dubbing a new proposal the “Buffett Tax Rule”.

What is the Buffett Tax Rule?

So what exactly is the Buffet tax rule?

The administration’s proposal would set a floor of a 30% income tax on those with incomes over $1,000,000 in a given year.  The goal is that no middle income taxpayer would pay a larger share of his or her income than someone making millions of dollars.

Why is the Buffett Rule So Popular Right Now?

There are three reasons the Buffett Rule has become popular right now.

Tax Deficits

First, the government is running massive budget deficits.

Just like a company whose revenue has dropped while expenses have stayed the same (or risen), the government is seeking new avenues of tax revenue. While it is unpopular to increase taxes on any set of taxpayers, targeting the richest of the rich is popular because it is perceived that they have the most money to spare.

Small Number of Taxpayers Impacted

Additionally, the number of taxpayers impacted by something like the Buffett Rule is incredibly small.

One White House official stated the estimate of who would be impacted is 0.3% of all taxpayers.  That having been said you are still talking about a significant number of people that would be hit with higher taxes.

Increasing taxes on such a small subset of the population is going to be much more popular with the general population and likely cost far fewer votes than charging higher taxes on the entire population.

Some Wealthy Taxpayers are Asking to Pay More

Warren Buffett isn’t alone in asking the government to tax him more.

There are groups of wealthy individuals that have come together to follow in his steps to ask for higher taxes.  However, it should be noted that any taxpayer — from the richest rich to the poorest poor — can pay additional tax to the government without having a law written to require them to do it.

Is the Buffett Tax Rule Law?

As of the time of this writing the Buffett Tax Rule has not been made into law.  It was not included in the administration’s proposed 2013 budget.

However, some senators introduced it as a bill called the Paying a Fair Share Act of 2012.  The bill passed with enough votes but was filibustered in order to kill the bill.

What Would Be the Impact of the Buffet Tax Rule Becoming Law?

If the rule were to become tax law, what kind of financial impact would it have for the government?  Would it solve all of our budget problems?

According to several tax think tanks, both liberal and conservative, the estimated increase in tax revenue would be $30 billion to $60 billion.

Considering the current year’s budget deficit is around $1 trillion and the current proposal for the next 10 years has a deficit of over $6 trillion, the overall impact is insignificant.  Assuming revenues increased $50 billion, that would be 5% of the $1 trillion deficit for the current budget year.

There are several other significant tax issues that need addressing in addition to the Buffett tax rule.

Instead of focusing just on increasing tax revenue, the government must also focus on cutting expenses.  With perhaps 5% of the budget deficit being impacted by the Buffett tax rule, the remaining 95% must come from somewhere.  Cutting spending drastically, changing the Alternative Minimum Tax, letting the Bush tax cuts expire, and encouraging future economic growth can all help change the current deficit situation.

Final Thoughts on the Buffett Tax Rule

While it is admirable that some wealthy individuals would like to pay more tax, it seems unnecessary to write the legislation into law since you can already voluntarily give more money to the government.

It seems odd that some of the wealthiest Americans want to force all of the wealthiest Americans to pay more in tax.  As shown, enacting a 30% minimum tax on millionaires will have a positive impact on the budget deficit, however as shown it is a minimal impact.

It also seems unfair to target such a small percentage of taxpayers for special taxation.  A fairer system would have all people paying an even percentage of their income in tax through a flat tax system.

Perhaps the Buffett Tax Rule is a step in that direction.

What do you think of the Buffett Rule?

See an interactive Buffett Rule calculator that shows how many millionaires pay a lower effective tax rate than you and more at www.whitehouse.gov.  Also take a look at the video below from the site discussing the Buffett Rule: