What’s this about a Buff tax!? Why should men and women with bulging muscles, searing pecks, and six-pack abs have to pay higher taxes than flabbies who eschew the weight room?
Oh, wait…it’s a Buffett tax…on millionaires…so they don’t pay a smaller share of income in taxes than their secretary…that’s different. Never mind.
Actually, let’s look at this principle for a moment, for “principle” it is—in fact, it doesn’t factor at all in the $1.5 trillion in revenue raised in the President’s budget plan. The administration laid it out as a guideline for tax reform, a kind of tripwire in the tax code to avoid the problem identified by billionaire Warren Buffet: because much of his income gets special treatment in the tax code, he faces a smaller effective tax rate than many in the middle class.
Here’s the White House’s description of the Buffett Principle:
No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay…this rule will be achieved as part of an overall reform that increases the progressivity of the tax code.
Now, it’s not the case that every millionaire pays a smaller share in taxes compared to middle class families. But, as my colleague Chuck Marr points out on the CBPP blog, if much of their income derives from non-labor earnings, like capital gains and dividend payouts from their equities, then they likely do pay less as a share of their income.
And in fact, Chuck features a graph showing that the effective tax rate (taxes paid as a share of income) on income and payroll taxes are about 15% for a middle-class family with mostly earned income, compared to 12% for a millionaire (or higher) household with at least 2/3 investment income.
Here’s another look at the same data from the Tax Policy Center. This figure shows the effective tax by share of investment income. The effective rate drops by half going from left (more labor income) to right (more capital income).
Source: Tax Policy Center, link above.
Is there a rationale for such favorable, and potentially distortionary, tax treatment? As noted here, I don’t see it, and the research is supportive of that view. It’s just another loophole (and another victory for the winning side in the class war, but that’s another issue…)
So if we actually wanted a rule in the tax code to enforce the principle, what would we do? Here’s Chuck’s advice:
Policymakers can address this situation in several different ways that would make the tax system fairer and also generate much-needed revenue. Most directly, they could tax capital gains and dividends at the same rate as ordinary income. Alternatively, they could enact a surtax on millionaires or a more effective alternative minimum tax on wealthy people.
At any rate [sic], it’s apparently safe to pump it up at the gym without inflating your tax bill.