What the 'Buffett rule' reveals about Obama tax reform plans

President Obama is pushing Tuesday for the so-called Buffett rule – a proposal to ensure that millionaires pay a higher rate on federal income taxes than the middle class. He and Democrats see it as a guarantee that the rich will pay more, even if Congress again extends the Bush tax cuts.

When President Obama travels to Florida Tuesday to argue for the so-called Buffett rule, he’ll be emphasizing a cornerstone of his economic agenda that would likely define the White House’s approach to future tax reform, as well as drawing a stark contrast between himself and his likely Republican presidential rival, Mitt Romney.

White House officials call the Buffett rule "a basic principle of fairness." Jumping off billionaire Warren Buffett's assertion that he should pay taxes at a higher rate than his secretary, the proposed rule would require Americans making more than $1 million a year to pay at least 30 percent of their income to the federal government, with deductions allowed for charitable giving and payroll taxes. 

The White House and congressional Democrats will use that basic principle to build their arguments for how to handle looming budget issues, namely that the payroll tax cut and the Bush tax cuts are set to expire at year's end. Mr. Obama has said he would like to extend such tax cuts for families making less than $250,000 per year, but would let the cuts expire for higher-earners. 

“Tax reform will be a long and difficult process, and so we think it’s appropriate not to wait to complete every aspect of reforming the tax system before locking in what should be the most simple, common-sense element of any tax reform, which is that no one who makes over $1 million per year is paying less than the middle class,” said Jason Furman, principal deputy director of the National Economic Council, during a conference call with reporters Monday. 

In addition to raising taxes on some millionaires, the Buffett rule would achieve two other tax-reform goals of Democrats.

First, it would blunt the impact of a full extension of the Bush-era tax rates. If Republicans succeed in maintaining the Bush tax cuts for all taxpayers, the Buffett rule would nonetheless ensure that wealthy Americans pay more – $162 billion more over 10 years, according to the congressional Joint Committee on Taxation. And if Congress lets the Bush tax cuts expire, most Americans' income-tax rates would go up, but under the Buffett rule it will go up more for the wealthy than it would otherwise, to the tune of $47 billion over a decade.

Republicans criticize the Obama administration for proposing a tax increase during a period of slow economic growth. But Obama officials argue that such a change results in greater economic efficiency.

“In addition to fairness, in fact it’s a step in the direction of economic efficiency,” said Alan Krueger, chairman of the Council of Economic Advisors. The Buffett rule allows people to "devote more effort what their focus should be, which is to their jobs and job creation … rather than restructuring their income to minimize their taxes.”

Second, the proposed rule would in effect raise taxes on dividends and capital gains income, funds currently taxed below the 35 percent statutory rate for ordinary income over $1 million.

“It’s just saying, in effect, you can’t run the tables and take advantage of all the different tax breaks,” said Jason Furman, principal deputy director of the National Economic Council, on a call with reporters Monday.

Mr. Furman would no doubt argue there are some who are “running the tables.” One in 4 of millionaires in America (94,500 taxpayers) pays at a tax rate that is lower than that of the 10.4 million Americans who make $100,000 per year, according to a nonpartisan Congressional Research Service report released in October.

Of those, a smaller group of millionaires, approximately 10 percent, pay little to no federal taxes, according to IRS data. 

Of the 241,528 households whose adjusted gross incomes were higher than $1 million in 2009 (the last year for which data are available), 9 percent (22,000) paid less than 15 percent of their income in taxes. One percent (1,470) paid no federal income taxes at all. Mr. Buffett, one of America’s most celebrated investors and businessmen, has said he paid just over 17 percent of his income in federal taxes last year. 

And one particularly important millionaire? Mitt Romney, the presumed GOP presidential nominee, paid a federal tax rate of 15 percent on his $20.9 million in income last year, a fact that Democrats are eager to get in front of middle-class voters. It remains to be seen whether Obama will bring up Romney's taxes when he speaks Tuesday on tax reform at Florida Atlantic University in Boca Raton.

But his campaign staff members aren't shy about doing so. Obama campaign manager Jim Messina ripped Mr. Romney for offering 23 years of tax returns to 2008 GOP presidential nominee John McCain for vetting purposes but only two years of such returns to the public in this presidential election cycle.

“Romney supports tax policies that reward people like him, and now he’s trying to obscure just how much he would benefit by hiding his own financial records,” Mr. Messina said to reporters Monday.