The Buffet rule won't work in practice

In his State of the Union speech, President Obama’s called for a new law that would require high-income people to pay at least 30 percent of their income in taxes. In response, Senator Sheldon Whitehouse (D-RI) and Representative Tammy Baldwin (D-WI) have introduced the Paying a Fair Share Act of 2012, a proposal designed to meet the Buffett Rule: That the wealthy pay at least as much tax as middle-income households.

That sounds straightforward but it’s not.

First, there’s the matter of how to measure income. The rule would define income as adjusted gross income minus a modified measure of charitable contributions. The adjustment avoids discouraging charitable donations.

Measuring taxes is more complicated. The proposal defines taxes to include the regular income tax, the individual alternative minimum tax (AMT), the employee’s share of payroll taxes that finance Social Security and Medicare, and the 3.8 percent tax on investment income and the 0.9 percent tax on earnings imposed on high-income taxpayers to help finance healthcare. That’s a broader measure than what most people see on their tax returns today, but it still excludes other taxes that people pay indirectly like corporate income taxes and the employer’s share of payroll taxes.

If you make at least $1 million (by the act’s definition) and your tax is less than 30 percent of that, you’ll owe more tax, presumably yet another addition on your income tax return. That’s certainly not tax simplification.

The Tax Policy Center estimates the proposal would increase 2015 taxes for about 116,000 households by an average of more than $170,000, assuming the Bush-era tax cuts expire as scheduled and Congress stops patching the AMT. That’s an overall tax increase of about $20 billion, not chump change but less than a tenth of the projected 2015 deficit. If Congress extends tax law in place this year, about 217,000 tax units would owe an average of nearly $190,000 more, yielding about twice as much additional revenue but still less than a tenth of a larger deficit.

The Buffett rule sounds good in principle. High-income taxpayers should pay at least as large a share of their income in taxes as the rest of us. But most already do. On average, middle-income households will pay 2015 taxes totaling about 15 percent of their income (using the legislation’s definition). Without the Buffett rule, more than 99 percent of millionaires will pay more than that and only about 4,000 will pay less. Barely 10 percent of them will pay less than 20 percent.

The proposed legislation would certainly raise taxes on a lot of high-income taxpayers. But the price would be even more complicated tax code. There are better ways to raise taxes on the rich.