The Buffett Rule Is A Good Idea

By Simon Johnson

Some high income Americans pay a lot of tax; others do not.  If you have right tax advice and if most of your income can be structured as some form of “capital gains”, your marginal rate – what you pay on the your last dollar of income – may be very low.  The highest marginal income tax rate currently is 35 percent, while long-term (over a year) capital gains are taxed at 15 percent at most.

The Buffett Rule is a proposal is establish a minimum tax rate for “millionaires” – people earning more than $1 million per year – and the Senate is likely to vote on a version this week.  The exact amount of revenue that this would bring in depends on the details, but there is no question that it is small relative to the country’s need to control the federal budget.  (The Joint Committee on Taxation scored one version of this proposal as generating about $30 billion over ten years; the annual budget deficit will remain over $1 trillion in the near term even under the most optimistic projections.)

The biggest sticking point for any reasonable strategy to control the US federal budget is that one side – the Republicans – steadfastly refuse to raise taxes, at all and on anyone.

There are three ways forward.  Either the Republicans begin to compromise – and agree to raise taxes as part of a comprehensive deficit reduction and debt control strategy, just as Ronald Reagan did.  There is a great deal of confusion about whether Reagan raised taxes after first cutting them; see chapter 3 of White House Burning for the details of what actually happened.

Or the Republicans who have signed the Taxpayer Protection Pledge will prevail – no one’s taxes will go up and, most likely, some people’s taxes will go down.  In this case, either the deficit will continue to grow (which is what Newt Gingrich is proposing) or Medicare and almost everything else the federal government does will be scrapped (which is the position represented by Paul Ryan).  My guess is that, in this scenario, we will say farewell to any meaningful form of social insurance – good luck getting healthcare when you are 85 (unless you earned over a million dollars a year for many years).

Or the Republicans will lose big – and fiscal consolidation can proceed without them.

A complete loss of support for the Republicans seems unlikely – they will surely hold more than 40 seats in the Senate for the foreseeable future.

So the fiscal trajectory of the country – and whether Social Security and Medicare survive – depends very much on whether the Republicans will compromise on taxes.

The Buffett Rule is a tiny tax, of little consequence to the people who would pay it or to the country as a whole.  The idea that $30 billion of additional revenue would tip the balance in any way is simply ludicrous.

But this is precisely what gives the Buffett Rule its powerful symbolism.

Much of federal government public finance is complex and hard for people to comprehend – demystifying deficits and debt is a major reason we wrote White House Burning.  Some of the reaction to our book is encouraging, particularly from people who are willing to spend some time with the details.

But the question behind the Buffett Rule is crystal clear and does not require you to buy a book or even read the newspaper.  Should all high income Americans pay a moderate level of tax?

11 responses to “The Buffett Rule Is A Good Idea

  1. ok, i see where you’re coming from…i wrote about the buffett rule last week (slow week) & blasted it as a deception “someone making $1,000,010 during the first year of the bill’s enactment (2013), the buffett rule would raise their entire tax $3.” and as too small: “the buffett rule would generate less than $5 billion a year, or less than the cost of 3 stealth bombers”
    but i concluded:
    but there’s even a better way than raising taxes and cutting spending to get our fiscal house in order, and that’s to get everyone who wants to work back to work…we saw last week that only 58.5% of the population is now employed, compared with 64.6% of us at the peak early in the last decade…just getting back to full employment brings 10% more taxpayers on-stream, and eliminates a number of recession-related government costs, such as unemployment compensation…

    so i still think the buffett rule is a distraction from our real problem; raise the minimum wage to $10, get everyone back to work, the fiscal problems solve themselves..

  2. How about we first cut the “defense” budget down by about 2/3? Then we can talk about raising my taxes. I don’t want to pay more to support the war machine.

  3. Yes, this is symbolic, but it also has very real consequences (all good IMHO). It will force the conversation and perhaps, just perhaps, strip away the perception that the GOP is fiscally responsible. When people do the math that the Ryan budget destroys the social insurance programs, maybe people will wake up. It will also start to limit the amount of free capital that some of the uber-wealthy use to tip the legislative playing field in their favor. Personally, I’d like to see capital gains taxed as income, but that is highly unlikely to fly in this congress.

  4. The INTENT of the Buffett rule is good; the execution is horrible. It’s essentially a second AMT tax layered on top of the AMT which is layered on top of the standard tax code. Silly.

    If we want to stop allowing carried interest to count as capital gains (which was an absurd loophole to begin with), then we should do that. If we want to change the capital gains tax to be progressive, then we should do that. If we want to just treat all capital gains as ordinary income, then we should do that. But we should not add another silly one-off gimmick to an already overly complex tax code.

  5. You mean it is a good political idea, not a good policy. Individuals have the first right to their earnings; where the government lays a claim on property, it requires justification. To tax someone for appearances alone weakens the moral grounding for the tax system as a whole.

    The real concern is that this ‘rule’ justifies an attitude in which taxes exist for the purpose of leveling wealth outcomes, rather than as an evil required for the necessary activities of the State. It also is leading to confusion about why the capital gains tax, for example, should be lower, or why social security taxes drop off after a certain income level. These sound like classist injustices if one doesn’t understand the reasoning behind them.

    A better way to accomplish the ‘buffett rule’ goal is to completely eliminate corporate taxes and make capital gains taxes 35%. This eliminates double taxation, addresses a whole host of ills associated to corporate gaming of the tax system and lobbyist/congressional gaming of the tax/subsidy system, may make America a more attractive place to locate a business, and restores the nominal tax rate of investors to something less rabble-rousing..

  6. There was a government created employment bubble at the 65% level which is regressing toward the mean. Too many activities were financialized:senior care,childcare, lawn care. Given the order of magnitude inefficiency of human labor many such activities are never going to be profitable and have to be done at the family/community level. It takes 100-1000 calories in for each calorie of human “work”. No government or business enterprise can overcome that loss in the new era of higher energy costs. The financial economy and the government need to shrink,at least by the same 20% as the employment.

  7. @Bogwood, “Too many activities were financialized:senior care,childcare, lawn care. Given the order of magnitude inefficiency of human labor many such activities are never going to be profitable and have to be done at the family/community level.”

    Right, thanks to the efficiency with which we can kill each other, that sector (military) will remain *profitable* into infinity….quite the new way to look at the guns vs. butter discussion….

  8. ‘The Buffett Rule is a tiny tax, of little consequence to the people who would pay it or to the country as a whole. The idea that $30 billion of additional revenue would tip the balance in any way is simply ludicrous.

    ‘But this is precisely what gives the Buffett Rule its powerful symbolism.’

    It’s Haidtism!

    http://campaignstops.blogs.nytimes.com/2012/03/17/forget-the-money-follow-the-sacredness/

    ‘The key to understanding tribal behavior is not money, it’s sacredness. The great trick that humans developed at some point in the last few hundred thousand years is the ability to circle around a tree, rock, ancestor, flag, book or god, and then treat that thing as sacred. People who worship the same idol can trust one another, work as a team and prevail over less cohesive groups. So if you want to understand politics, and especially our divisive culture wars, you must follow the sacredness.’

  9. Just what we need, a new word for a-hole…

  10. I have reservations about the exact structure of the tax–it runs the risk of causing someone’s after-tax income to fall as the increase pre-tax income, which ought to be a taboo in tax policy discussions…

    But as for the revenue, I don’t know why everyone is using this $47 billion figure, which is at best misleading, but also most likely just outright incorrect. The figure comes from a congressional committee, so we should view it as at best a back-of-the-envelope calculation, or really just someone’s guestimate. At any rate, that is not an official scoring of the legislation, and should not be treated as such. Independent estimates put the figure closer to $150 billion using the same baseline as the Joint Committee did, but actually taking the data into account.

    Which brings me to the second problem with the Join Committee’s guestimate: It is relative to current law–assuming all the bush tax cuts expire and the AMT is not modified–not current policy. Relative to current policy–in which we extend the bush tax cuts for the wealthy and prevent the AMT from going up–the buffet rule would generate closer to $265 billion in revenue.

    The real figures still do not generate tons of revenue. But they are more than enough to fund, for example, all federal nutrition assistance for children.

  11. The authors of “White House Burning” make 2 brief references to military spending (that I’ve found so far): one related to the War of 1812 and the other related to the abandonment of the policy of isolation during and following WWII. Social programs have been tagged as the largest category of government spending. Have the authors or any other commentators identified the degree to which military spending contributes to the debt crisis? If, say, all military spending were cut by 50%, what impact would this have on the problem?