President Obama is on the campaign trail promoting the Buffett Rule that the Senate will likely vote on in coming days. The Buffett Rule would slap a minimum tax rate of 30% on anyone who makes more than $1 million per year. Billionaire Warren Buffett came up with the idea. Apparently, he was disturbed by the fact that he pays a lower tax rate than his secretary. Why Buffett is focused on his rate rather than the $7 million he forked over to Uncle Sam is, well, confounding, but I’ll come back to that.
If implemented, the Buffett Rule wouldn’t even begin to make a dent in the budget deficit. Estimates show implementation would raise no more than $50 billion over 10 years. The Congressional Budget Office projects cumulative deficits of almost $11 trillion over the same time period. For those of you not doing the math, the Buffett Rule would reduce the cumulative deficit by a whopping 0.45%. And 0.45% may be on the high side. The nation’s highest income earners are a savvy group. When you change the tax rules, they hire teams of accountants and lawyers to minimize their tax liability. Decades of experience show that when the government raises tax rates, revenue doesn’t increase as a share of the economy. Instead, higher tax rates create distortions in the economy as individuals focus on tax avoidance.
Clearly, then, the Buffett Rule isn’t a revenue-raising scheme. But why would the president propose a tax hike that doesn’t raise much revenue? Political calculus is no doubt one of his primary motivations. Polls show that over 60% of Americans support the Buffett Rule.
The president also claims that America needs a Buffett Rule because it is not fair that Warren Buffett pays a lower tax rate than his secretary. Here is what Obama said at a campaign speech in Florida last week: “You might have heard of this, but Warren Buffett is paying a lower tax rate than his secretary. Now, that’s wrong. That’s not fair.”
It’s a fascinating argument. Let me try to get this straight. Warren Buffett and his secretary are both U.S. citizens, and they both receive the same government services. But because Mr. Buffett pays $7 million for his share of government services and his secretary pays maybe 1% of that, she is getting a raw deal. I don’t know what dictionary the president is using, but it doesn’t seem like Buffett’s secretary is being treated unfairly. It seems to me that the only thing that isn’t fair here is that Mr. Buffett has to pay $7 million to receive the same government services most Americans get for a fraction of that cost.
The Buffett Rule is bad policy. It will not raise meaningful revenue, it will distort the economy, and it will hinder economic growth.
Jeremy Jones, CFA
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