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.