Obama’s Math Flawed on ‘Buffett Rule’

Tuesday, 20 September 2011 05:45 PM

Turning the “Buffett rule” proposed yesterday by President Barack Obama from a political concept into real-world tax policy aimed at the highest-earning U.S. households will prove logistically and mathematically difficult.

The concept, named for billionaire investor Warren Buffett, would require Americans earning more than $1 million a year to pay at least the same tax rate as middle-class households. Constructing such a rule would be tricky because high earners aren’t the only taxpayers benefiting from breaks; many middle- income families use deductions, credits and exemptions to drive their rates below the 17.4 percent that Buffett says he pays.

For now, the Buffett rule is less of a concrete legislative proposal and more of a political talking point that has elicited Republican cries of “class warfare.” Democrats defended the idea and urged Congress to adopt it in designing a new tax system.

“We’re not going to give the Congress a detailed proposal for how to meet that principle because we think there are a bunch of different ways to do that,” said Treasury Secretary Timothy Geithner, adding that the details of the rule would depend on the rest of the structure of a revamped tax code.

Senator Charles Schumer of New York, the chamber’s third- ranking Democrat, said on a conference call with reporters yesterday that the proposal would have broad support in his party and would be a “game-changer” in the tax debate.

‘Defining Principle’

“It really works well as a defining principle, but I think it works even better as an actual piece of legislation,” said Schumer, a member of the tax-writing Finance Committee. “Let’s draft the language and get it scored. Let’s put it on the floor and let’s have a vote.”

It’s undetermined how much money the proposal would raise if applied to the current tax code or how many people would be affected. Senate Majority Leader Harry Reid, a Nevada Democrat, said in a floor speech yesterday that 22,000 Americans have incomes exceeding $1 million and pay less than 15 percent of their income in taxes.

“Middle-class families shouldn’t pay higher taxes than millionaires and billionaires,” Obama said at the White House yesterday. “Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it.”

The example that Obama gave during his speech illustrated the difficulty of applying the Buffett principle in practice. He said that a teacher earning $50,000 shouldn’t pay a higher tax rate than an investor making $50 million.

Deductions and Exemptions

Obama’s example isn’t as straightforward as it appears. Under current law, that teacher would have a maximum taxable income of $40,500, after subtracting the standard deduction and personal exemption. The teacher’s federal income tax would be $6,250, or 12.5 percent of the $50,000 income.

The teacher’s tax rate, though, would be higher if payroll taxes were included. This year, employees at that income level pay 5.65 percent of their wages, and employers pay 7.65 percent.

The middle-income tax rate would be lower if the teacher took advantage of the specific breaks available to middle-income taxpayers: those for retirement savings contributions and health-care flexible spending arrangements, and deductions for student loan interest and out-of-pocket expenses of educators.

The tax rate would be even lower if the teacher were married or had children, which would allow for a larger standard deduction, personal exemptions and a child tax credit. A married couple with two children can earn as much as $45,776 without paying income taxes this year, according to the Tax Policy Center, a nonpartisan Washington research group.

Complicated Arithmetic

As a result of those complexities, lawmakers trying to write a Buffett rule would have to make some choices about how to define a middle-income family’s earnings and tax rate.

They also face complicated arithmetic for higher-income taxpayers. Assuming the millionaire investor received all of his or her income from long-term capital gains and dividends, the tax rate would be 15 percent, the preferential rate for investment income.

That rate could be much lower if the investor took itemized deductions for state and local taxes, mortgage interest and charitable contributions. It would be higher if the investor also had some wage income, which would be subject to a 35 percent top rate and at least some payroll taxes.

Writing a Buffett rule into law would require defining income and setting a minimum rate for it, said Roberton Williams, a senior fellow affiliated with the Tax Policy Center.

“Every time you set up something like this, you’re opening the door for the tax lawyers to come in and get around the attempt to raise revenues,” Williams said.

Buffett’s Tax Bill

Buffett, the 81-year-old chairman and chief executive officer of Berkshire Hathaway Inc., said his federal tax bill last year, or the income tax he paid and payroll taxes paid by him and on his behalf, was $6.93 million.

“That sounds like a lot of money,” Buffett wrote in an essay, published last month in the New York Times, that called for higher taxes on millionaires. “But what I paid was only 17.4 percent of my taxable income -- and that’s actually a lower percentage than was paid by any of the other 20 people in our office.”

Senator Jim DeMint, a South Carolina Republican, said on Bloomberg Television today that he wanted to see Buffett’s tax return.

Several bipartisan groups, including the fiscal commission appointed by Obama last year, have proposed eliminating the preferential tax rates for capital gains as part of a tax overhaul that also would lower rates on wage income.

That approach, rather than the calculation of a minimum tax, might be the most straightforward way to satisfy the Buffett principle, Williams said.

Preferential Rate

Alan Viard, a resident scholar at the American Enterprise Institute, a Washington group that favors smaller government, disputed the idea that most millionaires pay lower tax rates than the middle class.

“One reason you have a preferential rate today for investments is because they’re already taxed at the corporate level,” he said. “You have to consider both levels of tax.”

The Buffett rule would essentially operate as a type of alternative minimum tax.

The AMT came into its current form in the 1986 tax-code overhaul. It requires taxpayers to compare their tax liability under the regular tax code with their liability under the AMT. Because the AMT doesn’t allow taxpayers the full benefits of the state and local tax deduction or personal exemptions, people who have large families or who live in high-tax states tend to be disproportionately affected.

Legal Tax Avoidance

Congressional efforts to prevent people from legally avoiding all taxes haven’t been successful. In 2008, the most recent year for which data are available, 18,783 people filed U.S. tax returns with adjusted gross incomes of at least $200,000 and owed no taxes. That represented 0.43 percent of high-income taxpayers, the biggest non-payer percentage in an Internal Revenue Service study that dates to 1977.

Lawmakers could satisfy the Buffett rule by disallowing the lower rates for capital gains and dividends under the existing AMT, with a top rate of 28 percent, said Jeff Hamond, a former Schumer tax aide who is now a vice president at Van Scoyoc Associates, a Washington lobbying firm.

“That wouldn’t be simple,” he said. “But it could be a placeholder until comprehensive tax reform passes, and the richest Americans would definitely pay a higher effective rate than the middle class.”

© Copyright 2020 Bloomberg News. All rights reserved.

1Like our page
Turning the Buffett rule proposed yesterday by President Barack Obama from a political concept into real-world tax policy aimed at the highest-earning U.S. households will prove logistically and mathematically difficult. The concept, named for billionaire investor Warren...
Tuesday, 20 September 2011 05:45 PM
Newsmax Media, Inc.

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

America's News Page
© Newsmax Media, Inc.
All Rights Reserved