Arguing the Buffett rule

Invoked by Obama, the Buffett rule simply states that millionaires should have a higher tax rate than the middle class. Why is there any objection?

On Monday, the Administration released its deficit reduction blueprint. One part of the Administration’s proposal, which has received enormous attention, was that the Joint Select Committee on Deficit Reduction observe the “Buffett Rule” if it attempts tax reform. The furor over this proposal is surprising and the debate about it seems to have largely missed the point.

For background, the proposed Buffett Rule, so named from Warren Buffett’s op-ed in the New York Times, says, “No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families.” Setting aside the ambiguous definition of “middle-class,” the intent of the proposed rule is clear: tax reform should follow the principle of vertical equity, a hallmark of the progressive tax system—that as one’s income increases so should one’s tax payments as a share of income.

To see why the furor is surprising, note that the Buffett rule is an extremely mild form of progressivity – it just says that tax payments as a share of income shouldn’t be lower for someone with high income than for someone with low income. Is anyone seriously proposing the opposite? That people with income above $1 million should pay a lower share of their income in taxes than a middle-class family?

If not, then what is objectionable about the Buffett Rule?

Opponents to the Buffett Rule frequently make the point that households with the highest-incomes already, on average, pay a higher portion of their income in taxes than middle-income households. Indeed, according to estimates from the Tax Policy Center, those making over $1 million in cash income paid an average federal tax rate (excluding excise taxes) of 29.1 percent while those with cash income between $50,000 and $75,000 paid an average federal tax rate of 15 percent.

This type of analysis, though, is based on averages. The Buffett Rule as proposed by the Administration would apply – precisely and only – to those high income households who are paying less than the middle class average tax rate. The fact that the average tax rate among very high income households is higher than among middle class households means that the system, on average, is progressive, but it can still be the case – and is – that some people with very high income pay little or no taxes. That is what the Buffett Rule is addressing.

The Buffett Rule is also a matter of horizontal equity, a concept often used when analyzing the fairness of tax proposals but notably absent from the current debate. In an equitable system, people of similar means should have similar tax burdens. The Buffett Rule could improve both the vertical equity and the horizontal equity of the federal tax system by ensuring that every millionaire pay a minimal rate.

To be clear, the Administration did not suggest how the Buffett Rule be implemented nor did it score specific versions. Rather, it proposed that the Joint Select Committee observe the principle of vertical (and horizontal) equity when trying to reform taxes. The Buffett Rule could be a guideline either for tweaks to the tax code that will reduce the deficit or for comprehensive tax reform. In any case, the vehement opposition to the proposed rule seems unfounded.

For another view, see Howard Gleckman’s post today.