'Buffett Rule' Not a Serious Response to Budgetary Problems

About Alan D. Viard:

Alan D. Viard is a resident scholar at the American Enterprise Institute.

The "Buffett rule's" stated goal of making millionaires pay the same tax rates as the middle class is appealing. Unfortunately, the proposal is based on inaccurate claims about the tax system and its enactment would penalize the investment that fuels long-run economic growth.

Some Buffett rule advocates contend that millionaires typically face lower federal tax rates than the middle class, a claim squarely contradicted by the data. The Urban-Brookings Tax Policy Center reports that Americans with incomes above $2 million (the top 0.1 percent) paid 32.1 percent of their income in federal income, payroll, and other taxes in 2011. Meanwhile, Americans in the middle of the income distribution paid only 12.6 percent of their income in federal taxes.

[See a collection of political cartoons on the budget and deficit.]

The Obama administration admits that "the United States has a progressive tax system" and that "on average, high-income Americans do pay more" tax than middle-class Americans. The administration says that the Buffett rule is not aimed at average millionaires, but at those with unusually low tax bills. Of course, even those millionaires are likely to be paying more than the 12.6 percent paid by the middle class, if not the 30 percent demanded by the Buffett rule.

In any event, the proposal's focus is surprisingly selective. The Buffett rule primarily targets millionaires who earn long-term capital gains, which are slated to face a 20 percent tax rate next year, but leaves completely unscathed those who earn municipal bond interest, which faces a zero tax rate.

[Read what the Buffett Rule Gets Wrong.]

The proposal's focus on capital gains is dubious economic policy. A significant portion of capital gains arise from the reinvestment of corporate profits on which corporate income tax has already been paid. For those gains, the special 20 percent income tax rate mitigates the double taxation of corporate investment and dampens the artificial tax incentive for excessive corporate debt. It would be a mistake to hike taxes on those gains, either directly or indirectly through the Buffett rule's convoluted minimum tax.

The resolution of the long-term fiscal imbalance facing our nation is likely to include tax increases on the rich. But, as commentators across the ideological spectrum recognize, raising taxes on the rich will not be sufficient to close the fiscal gap. Entitlement cuts and more broadly based tax increases will also be necessary. Increasing investment taxes on a small group of millionaires is a political gesture, not a serious response to the budgetary challenge.

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