The Buffett Rule: A Gimmick Worth Debating

The Buffett Rule: A Gimmick Worth Debating

The Fiscal Times/iStockphoto

This week, President Obama ratcheted-up his support for the so-called Buffett rule. Named for billionaire Warren Buffett, who claims to have a lower effective federal tax rate than his secretary, the rule would require all those with incomes of $1 million or more to have at least a 30 percent federal tax rate. A vote on legislation implementing the Buffett rule is expected to take place in the Senate on Monday.

Although the Senate vote is doomed to a certain Republican filibuster, the debate is worth having. Sooner or later, taxes are going to have to rise substantially to pay for all the health and retirement benefits that have been promised to aging baby-boomers, and it is a pipe-dream to think that spending will ever be cut enough to avoid that necessity. If the rich don’t pay more then the rest of us will.

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There is also an important issue of fairness in the fiscal restructuring debate. Republicans like Rep. Paul Ryan want 100 percent of the burden of adjustment to fall on spending; none on taxes. Indeed, his plan would cut taxes, mainly for the wealthy, by $10 trillion over current law ($5 trillion if the Bush tax cuts are extended) in just the next 10 years. At a minimum, this means that spending must be cut $5 to $10 trillion more than necessary to achieve his deficit target.

Even if one dismisses Ryan’s tax plan as nothing more than pandering to the Republican Party’s wealthy campaign contributors, there would still be a fairness problem. That is because the wealthy get very little in the way of government benefits on the spending side. If every one of those in the top one percent of the income distribution was completely barred from receiving Social Security, Medicare, farm subsidies or any other government benefit, it would be like a drop in the ocean compared to the fiscal problem we face.

The fact is that the vast bulk of benefits received by the wealthy from government come on the tax side of the ledger. In particular, they pay at most a 15 percent federal tax rate on their income from capital gains and dividends, while the tax rate on wage income can go as high as 35 percent plus the payroll tax. (Generally speaking, the payroll tax applies only to wages and exempts dividends and capital gains.) Moreover, the rich are often able to convert their ordinary income into lower taxed capital gains or dividends. One notorious way of doing so, called “carried interest,” involves wealthy hedge fund managers whose management fees are treated as capital gains for tax purposes.

For some odd reason, the special deals that rich people get from the tax code are not universally viewed as unfair or unjustified. This didn’t used to be the case. At least through the 1980s, special tax breaks, such as those for dividends and capital gains, were viewed as unfair and unjustified. Indeed, Ronald Reagan was among those who decried the capital gains break because it meant that rich people, who get most of their income from capital, paid less taxes than the average working man. Consequently, as part of the Tax Reform Act of 1986, he agreed that income from capital gains and wages ought to be taxed at the same rate.

Reagan was building on long tradition by Republicans of demanding fairness in the tax code, which, among other things, meant making sure that capital and labor were treated equally. For example, in his first State of the Union Address in 1861, Abraham Lincoln said, “Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”

In 1910, Theodore Roosevelt excoriated big corporations and wealthy men for rigging the system in their favor and not paying their fair share of taxes.

The true friend of property, the true conservative, is he who insists that property shall be the servant and not the master of the commonwealth; who insists that the creature of man's making shall be the servant and not the master of the man who made it. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being….

We grudge no man a fortune in civil life if it is honorably obtained and well used. It is not even enough that it should have gained without doing damage to the community. We should permit it to be gained only so long as the gaining represents benefit to the community. This, I know, implies a policy of a far more active governmental interference with social and economic conditions in this country than we have yet had, but I think we have got to face the fact that such an increase in governmental control is now necessary.

No man should receive a dollar unless that dollar has been fairly earned. Every dollar received should represent a dollar's worth of service rendered - not gambling in stocks, but service rendered. The really big fortune, the swollen fortune, by the mere fact of its size acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means. Therefore, I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective - a graduated inheritance tax on big fortunes, properly safeguarded against evasion and increasing rapidly in amount with the size of the estate.

In 1954, Dwight Eisenhower said that everybody should pay their fair share and denounced unjustified tax cuts. “An unwise tax cutter, my fellow citizens, is no real friend of the taxpayer,” he said.

In short, the real debate on the Buffett rule is about fairness. Its particulars are less important – especially since it has no chance of passage at this time – than the debate that will accompany it. If Republicans are successful in conveying the message that it’s okay for rich people to pay less than working people then this will frame the forthcoming budget debate in a particular way; perhaps making the Ryan plan an asset in the presidential campaign rather than an albatross.
But if Democrats are successful in getting across the idea that fairness means that all Americans, including the rich, must tighten their belts to get the budget deficit under control, then the debate will go in a different direction; with Republicans perhaps being willing to relent on their obsessive opposition to higher taxes for anyone.

Next week’s Senate debate on the Buffett rule should be viewed as a preview of many debates to come between now and November.