3 Things to Know About the Buffett Rule

by Christopher Freeburn | April 10, 2012 12:57 pm

As the presidential campaign heats up, President Obama is making the “Buffett Rule” a mainstay of his campaign. Named after iconic investor Warren Buffett’s observation that a billionaire like himself should pay a lower effective rate of tax than his secretary, the rule plays into the president’s overall theme of increasing taxes on the wealthy.

The National Economic Council defines the Buffett Rule[1] as a “basic principle that no household making over $1 million annually should pay a smaller share of their income in taxes than middle class families pay.”

Senate Democrats have incorporated the principle into the “Paying a Fair Share Act,” which mandates a minimum 30% income tax[2] for people with incomes over $1 million. They hope to hold a procedural vote on the bill sometime next week, CNN Money reported. While the bill will likely fail, the effort will become a focal point as November looms.

With the Buffett Rule ready to take center stage, here are three things you should know about it:

  1. It won’t raise much money: The Joint Committee on Taxation calculates that the “Paying a Fair Share Act” would boost federal revenues by a paltry $4.7 billion per year over the next decade, CNN Money reported. With the current federal deficit well over $1 trillion, that’s almost literally a drop in the bucket. Faced with these numbers, the White House has admitted that the Buffett Rule won’t help reduce deficits[3], Politico noted.
  2. It will raise taxes on capital gains and dividends: Income from capital gains and dividends is currently taxed at a much lower rate[4] than regular income. Many wealthy investors – like Warren Buffett – generate a significant amount of income from such sources. Should the rule go into effect, people whose incomes exceed the threshold will find their capital gains and dividends tax rate effectively boosted, the Christian Science Monitor reports. One particular high-income earner who would be affected by this change just happens to be prospective GOP presidential candidate Mitt Romney, as the White House quickly pointed out.
  3. Most millionaires do pay higher taxes: According to Bloomberg News, the nonpartisan Tax Policy Center (TPC), says most millionaires already pay a higher percentage of income taxes[5] compared to middle-class taxpayers. Bloomberg cited TPC data showing that out of 217,000 households that could fall under the Buffett rule, only 4,000 generate annual incomes greater than $1 million and pay tax rates lower than 15%. CNN Money said research from the Congressional Research Service cited the current average tax rate for millionaires as nearly 30%.
  1. defines the Buffett Rule: https://investorplace.com/investorpolitics/the-buffett-rule-a-basic-principle-of-tax-fairness/
  2. a minimum 30% income tax: http://money.cnn.com/2012/04/09/pf/taxes/buffett-rule/index.htm
  3. won’t help reduce deficits: http://www.politico.com/news/stories/0412/74975.html
  4. taxed at a much lower rate: http://www.csmonitor.com/USA/Politics/2012/0410/What-the-Buffett-rule-reveals-about-Obama-tax-reform-plans/%28page%29/2
  5. higher percentage of income taxes: http://www.bloomberg.com/news/2012-04-10/top-earners-pay-higher-tax-rate-than-others-without-buffett-rule.html

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