What the Buffett Rule Gets Wrong

A small step toward a fairer tax code won't do anything to restore prosperity.

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Many Americans feel dispossessed. Data supports their grievances: Incomes are stagnant, joblessness is high, and more people really are falling behind.

President Obama thinks he has a solution: A new "fairness" agenda that starts with the "Buffett Rule," a proposal to raise tax rates on millionaires to the same levels as middle-class earners typically pay. This would be followed by other measures meant to assure that "everyone gets a fair shot and everyone does their fair share," as Obama has said repeatedly.

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The U.S. tax code is certainly a mess that favors those able to move their money around and hire experts to take maximum advantage of loopholes. The Buffett Rule is actually sensible, because it would plug some of the holes that special interests have drilled into the tax code over the last 50 years. But it also seems like the wrong place to start trying to revive America's fortunes, for at least two reasons.

The first problem is that the Buffett Rule and Obama's whole fairness doctrine perpetuates the fiction that Washington can solve the overarching problem of fading prosperity. This might have been plausible 50 years ago, when the U.S. economy was far more self-contained and growing at a heady pace that made lavish government spending possible.

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These days, however, the federal government is heading toward insolvency, and many aspects of the global economy are beyond Washington's control. The enormity of the national debt, which now tops $15 trillion, makes it a mathematical certainty that Washington is going to do less for citizens and ask them to contribute more. If politicians were honest, they'd prepare voters for the sacrifices that lie ahead, instead of promising 99 percent of them that everything will be fine as long as the other 1 percent pays more.

The Buffett Rule would impose a minimum effective tax rate of 30 percent on people who earn more than $1 million per year, raising the average tax rate for that group by a few percentage points. But even the White House acknowledges the amount of extra revenue raised would be trivial compared to the size of the debt. Obama suggests that higher taxes on the wealthy will reduce the need to raise taxes on the middle class. But nearly every budget expert will tell you that the only way to get the debt under control is to raise taxes on virtually everybody, or eviscerate government services.

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The second problem is that Obama is still not telling struggling Americans what it will really take to revive their own fortunes and, to some extent, the nation's: More grit, more self-sufficiency, a more entrepreneurial spirit, and greater engagement with the world beyond U.S. shores.

There are many Americans who have what it takes to succeed in the hypercompetitive global economy. Others are getting the right skills and going where the best opportunities are--which sometimes means overseas. But too many Americans are stuck in place, waiting for jobs that are never coming back or hoping the government will intervene and fix things. The odds are very high that it won't. The government lacks the money and know-how to reboot most parts of the economy. Plus, ongoing paralysis in Washington makes the government the least effective cog in the whole American system.

This is not to say that free-market incentives and more competition are the answer, as many conservatives insist. All the bailouts, corporate meltdowns, and economic disasters of the last decade have made it clear that capitalism generates turbulent waters, not the gentle rising tide that capitalist romantics believe. It raises some boats, swamps others, and threatens a tsunami every now and then.

We need nimble government that enforces some healthy rules, but we also need robust citizens who take smart risks, bounce back from setbacks, and rarely think of government as part of their strategy to get ahead. Warren Buffett, the man, is an exemplar of such drive. The rule named after him isn't.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success, to be published in May. Follow him on Twitter: @rickjnewman.