Buffett Rule: Five Questions About Obama's Plan Answered

Warren Buffett
Getty Images
Warren Buffett

President Obama is making a proposed "Buffett rule" for millionaires a centerpiece of his reelection campaign, as he seeks to cast Republicans as favoring unfairly low taxes on the wealthy at a time of chronic federal deficits. His idea is to make sure that top-earning Americans like Warren Buffett pay at least a 30 percent federal tax rate.

Here are five questions and answers that shed light on Mr. Obama's proposal and the debate surrounding it.

1. Do the rich pay a fair tax rate?

Obama's argument centers around a long-term trend: the effective tax rate paid by the highest-earning Americans has fallen sharply – much more so than for middle-income households. A chart released by the White House shows the average tax rate paid by the top 0.1 percent of earners falling from above 50 percent in 1960 to below 30 percent by 2010.

"If you make more than $1 million a year, you should pay at least the same percentage of your income in taxes as middle-class families do," Obama said in a White House appearance on April 11.

According to the White House's own figures, however, top earners do pay at a higher rate than middle-income earners, despite the decline in their effective tax rate. Families in the middle of the income range pay an average federal tax rate below 20 percent in the White House chart, which includes payroll taxes for Social Security and Medicare as well as the personal income tax.

But as Obama points out, the wealthy pay at rates that can vary wildly, depending on the kind of income they earn and the loopholes they may use. If income arrives as capital gains rather than as wages, for instance, the current law applies a low 15 percent tax rate. The 400 highest-income households paid just 18 percent of their incomes in federal taxes in 2008, down from about 30 percent in 1995, according to the White House analysis of government tax data.

Obama pressured Republicans by citing Ronald Reagan as another president who essentially endorsed the Buffett rule. In 1985, Reagan urged tax reform by citing the example of a business executive paying lower taxes than his secretary. However, the White House chart suggests that in practice, Reagan's 1986 tax reform resulted in lower taxes for the wealthy.

Currently, the top 1 percent of taxpayers earn about 17 percent of all "adjusted gross income" calculated by the Internal Revenue Service, and they pay about 37 percent of all income taxes, according to the Tax Foundation, a Washington research group.

2. Would the plan lower the deficit?

It's not yet clear what precise form a Buffett rule would take, if it passed. The Obama administration hasn't spelled out a plan in detail. But one Buffett rule proposal, launched by Sen. Sheldon Whitehouse (D) of Rhode Island, would bring in about $47 billion in extra revenue during the next decade, according to Congress's Joint Committee on Taxation. By other estimates, the rule could bring in more revenue than that (as much as $171 billion) or less.

In any case, the rule would fix only a small part of a budget gap that totals $6.7 trillion in Obama's budget outlook for the decade.

Confronting critics who say it wouldn't patch the budget hole, Obama said simply, "I agree," while arguing that it's still right to take steps in a positive direction.

Senator Whitehouse says his bill would "ensure that multimillion-dollar earners pay at least a 30 percent effective tax rate," while preserving a tax-deduction incentive for charitable giving. The Senate measure is not expected to win enough votes to avoid a filibuster.

3. Is rich-poor gap growing?

Economists have documented a widening rich-poor income gap in recent decades, but many of them say tax policy isn't the biggest cause of the trend.

Other central factors may include an increasingly high-tech economy, which puts a premium on skills and education, and the declining clout of labor unions, which has tilted power from labor toward owners of capital.

Another factor is that globalization has exposed millions of middle-wage workers to new competition from overseas, while opening up opportunities for entrepreneurs to profit from global ventures.

Still, Obama and his tax-plan supporters say such points don't make the Buffett rule a bad idea. The plan is just asking society's most fortunate and prosperous to pay a little more, they say, at a time when budget deficits are high and other Americans are being asked to bear the brunt of new federal spending cuts.

4. Would tax boost economic growth?

Conservatives have long attacked the Buffett rule as an example of an Obama "class warfare" mind-set. Their argument is essentially that low tax rates for all Americans will help the whole economy prosper.

President Barack Obama speaking on the "Buffett Rule" in Boca Raton, FL.
President Barack Obama speaking on the "Buffett Rule" in Boca Raton, FL.

Obama sought to fight back on that front Tuesday.

"This is not simply an issue of redistributing wealth," he said. "This is not just about fairness. This is also about growth. This is also about being able to make the investments we need to succeed."

You can expect this philosophical debate between Obama and Republicans to be a loud and long one between now and the November election.

Conservative economists say that low tax rates on business and on capital gains help spur job growth. They note that many small businesses pay their taxes by way of the owner's personal income tax return, so a tax on millionaires is also a tax on job creators. They add that marginal tax rates on top earners would go much higher than 30 percent under a Buffett rule, when you account for factors like state taxes and the way the Buffett rule's phase-in would affect incomes between the $1 million and $2 million level.

Republicans argue, moreover, that the Buffett rule could be the tip of a tax iceberg. They say many congressional Democrats would like to raise taxes on the middle class, not just on the rich, rather than impose spending discipline during a second Obama term.

Obama contends that the Buffett rule won't be onerous, that he has a track record of cutting taxes on small businesses, and that US prosperity depends on taking prudent steps to close federal deficits and sustain the middle class. He accused Republicans of wanting "to double down" on a failed strategy of cutting taxes for the very rich.

"In America, prosperity has never just trickled down from a wealthy few," Obama said. "Prosperity has always been built from the bottom up, and from the heart of the middle class outward."

5. Are Americans with Obama?

"Most Americans agree with me," Obama said in Wednesday remarks on the Buffett rule. "So do nearly half of all Republicans across America."

He also said one survey has found that two-thirds of millionaires support the Buffett rule concept.

It's true that Obama is seizing on an issue where he can tap into some broad-based public support. For example, a CBS News/New York Times poll in January poll found a majority of Americans would support taxing capital gains and dividends at the same rate as wage income in the interest of fairness and reducing deficits.

But different polls have suggested that Americans' views about tax hikes could be more nuanced.

Yes, polls have shown support for higher taxes on the rich. But many Americans worry that rising tax rates could harm the economy, and a recent poll of 1,000 likely voters in 12 potentially pivotal swing states found people split over how to define tax "fairness."

Some 35 percent said the "most fair" system would ask wealthy Americans to pay a higher rate than others. But 33 percent chose a system where everyone pays the same rate as "most fair," while 27 percent opted for the view that "every American should pay at least something in taxes, even if they are lower income."

The same poll, conducted by the center-left group Third Way, asked about the best way to address income inequality. A Buffett rule view, "to ensure the rich are paying their fair share in taxes," came in way behind "to expand economic opportunities for the middle class." And in a second pairing, the Buffett rule mantra fell well behind "to lower taxes on those who can create jobs and expand economic opportunities."

When it comes to deficit reduction, a Gallup poll last year found Americans much more inclined to address the challenge through spending cuts, or a mix of spending cuts and tax hikes, than by an approach that relies mainly on tax hikes. Obama has called for a blended approach to deficit reduction.