Jason Furman is principal deputy director of the National Economic Council.
The Buffett Rule is an important part of President Obama's deficit reduction proposal.
Last month, the president laid out a balanced approach to further reduce our nation's deficit and get our fiscal house in order, based on the values of shared responsibility and shared sacrifice. The president also called on Congress to undertake comprehensive tax reform based on five principles: cutting tax rates, cutting tax expenditures, cutting the deficit, increasing economic growth, and the Buffett Rule. This last principle is simple: No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has said, it's not fair for people like him to "pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter."
Warren Buffett is not alone among the very wealthy in paying only a small share of income in taxes. Many households making over $1 million annually, like small businesses and professional athletes, pay close to their marginal rate and would not be affected by the Buffett Rule. But 22,000 households making more than $1 million annually paid less than 15 percent of their income in taxes in 2009 and many more paid less than 30 percent of their income in taxes. And the top 400 richest Americans, all making over $110 million per year and making an average of $271 million per year, on average paid only 18 percent of their income in income taxes in 2008. That is down substantially from the 29.9 percent these households paid as recently as 1995.
Too many middle-class Americans pay more than this—especially when payroll taxes are taken into account. For example, a single, self-employed business owner earns $70,000. In income and payroll taxes, this middle-class business owner pays about 28 percent of income in taxes. That's a 50 percent higher rate than the average tax rate on the top 400.
The Buffett Rule only applies to three out of every 1,000 Americans and it would impact even less than that since many of these wealthy Americans already pay near the top marginal rates. Virtually all small businesses would be unaffected, either because their income is less than $1 million or because they are paying taxes at close to the marginal rate. In fact, the president is pushing for tax cuts for small businesses, including cutting payroll taxes in half, eliminating payroll taxes for businesses adding jobs, and letting all businesses fully expense the cost of their investments.
The president has called on Congress to pass the American Jobs Act to jump-start the economy today and to pass a broader deficit reduction plan to bring down our debt as a share of the economy. As part of this deficit reduction plan, the president is calling for $2 of spending cuts for every $1 raised through reforming the tax code. The spending reductions are achieved while strengthening critical programs like Medicare and Medicaid.
But the president does not believe we can follow an unbalanced, spending-only approach to deficit reduction that cuts the deficit by ending Medicare as we know it while not asking high-income households to contribute. We can't tell our teachers and secretaries, working to put food on the table for their families or put their kids through college, to pay a higher tax rate than many millionaires. That is why he is calling for comprehensive tax reform that would meet the test of the "Buffett Rule."
Read Rep. James Lankford: The 'Buffett Rule' Is Bad Tax Policy.
- Brad Bannon: Big Businesses, Not the Poor, are Federal Freeloaders
- Check out a roundup of editorial cartoons on the economy.
- Read 10 Things You Didn't Know About the Bush Tax Cuts.