Category Archives: Warren Buffet

The Buffett Rule and Its Potential Impact On Our Economy

On Wednesday Senate Democrats proposed legislation that would ensure all millionaires pay a minimum federal tax of 30 percent, otherwise known as the Buffett Rule. The people over at Citizens for Tax Justice have come out with a study on the Buffett Rule (full report here) and the kind of impact it would have on our economy. I have broken down some of their findings below. 

Revenue Impact Depends on the Extension or Expiration of the Bush Tax Cuts 

The Buffett Rule would raise about $25 billion annually in years after 2012, while ending tax preferences for investment income would raise around $70 billion annually. These estimates assume the Bush tax cuts expire after 2012 as scheduled. 

In 2012, or in any year in which the Bush tax cuts are in effect, the Buffett Rule would raise around $50 billion while ending tax preference for investment. 

In other words, either of these policy options (the Buffett Rule or ending tax preferences for investment income) would raise more revenue if the Bush tax cuts are extended — but not nearly enough to offset the cost of extending those tax cuts.  

Under the Bush tax cuts, long-term capital gains are taxed at a top rate of just 15 percent while other income is taxed at rates of up to 35 percent, and stock dividends are taxed at a top rate of 15 percent also. The ability of wealthy people with investment income to pay lower effective rates than people with ordinary income is therefore greater in any year in which the Bush tax cuts are in effect. And any policy option to remedy that problem will therefore have a larger revenue impact during any year in which the Bush tax cuts are in effect. 

Of course, the Bush tax cuts include benefits that go far beyond breaks on investment income, and that’s why extending the Bush tax cuts would be extremely costly even if the Buffett Rule was enacted or all tax preferences for investment income were eliminated. 

The Need for the Buffett Rule 

A previous report from Citizens for Tax Justice explained how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people. As the report explains, there are two reasons for this. 

First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends, as already explained. 

Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect). 

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million. For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. 

For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent. This is the problem that the Buffett Rule would solve.


The Richest Americans and Their Tax Rate

The GOP has been saying in ad nauseam that the way to grow the economy is not by raising taxes on the wealthiest because they are the ones that create jobs, the trickle down economics theory.

Needless to say this has been proven wrong over and over. Just in the past decade, tax rates were decreased to their lowest levels in over 50 years (I have also previously posted an interview with Warren Buffett who acknowledged the inequality in our current tax system stating that his secretary pays more in taxes than he does).   

 The IRS has released data on the tax rates for the 400 richest Americans in 2008. 

The IRS report shows that in 2008 (the latest year for which data are available), the 400 richest income tax filers paid just 18.1 percent of their adjusted gross income (AGI) in federal income taxes. That is down from 22.3 percent in 2000, and is just more than half of the top statutory income tax rate of 35 percent. More than half of the income reported by those 400 taxpayers consisted of capital gains and dividends subject to the preferential rates.

The IRS report, which shows the effective federal income tax rates paid by the 400 highest-income Americans in each year since 1992, offers an important opportunity to understand how the tax system affects the most privileged Americans.

  • Only those with at least $109 million of AGI were members of this group in 2008, and the average AGI for these 400 taxpayers was $270 million. 
  • Each one of these 400 taxpayers enjoyed, on average, more than $155 million of net capital gains and dividend income that was subject to special lower tax rates in 2008.
  • Although 400 returns are less than 1/1000th of a percent of the total individual tax returns filed, these 400 taxpayers collected more than 10 percent of the total preferential-rate capital gains and dividends in the nation in 2008.
  • These 400 taxpayers paid income taxes averaging just under $49 million in 2008. As a share of AGI, their tax bills averaged 18.1 percent. 
  • This decline from 22.3 percent to18.1 percent represented a total tax cut of $4.5 billion in 2008 for this group, or an average tax cut of over $11.3 million each.

“This valuable data confirms what we already knew—that the very richest Americans are paying much less of their income in tax than many would have us believe,” noted Citizens for Tax Justice director Robert S. McIntyre. “These taxpayers are now paying lower effective tax rates than at virtually any time since the IRS began publishing these data in 1992—and the Bush Administration’s capital gains and dividends tax cuts are the main culprit.”

Warran Buffett Comes Out Against Current Tax System

Warren Buffett wanted to illustrate how lopsided our tax system is, so to prove his point he compared his tax rate to that of his employees.  He polled his office and 15 out of 18 people participated.  The finding was that his total tax rate including payroll and income tax was 17.7%.  The average for his employees was 32.9%.  The interview is about 5 minutes long and well worth the time.