Why We Need a Buffett Rule Seven Convincing Reasons

Seth Hanlon February 2012

In recent months President Barack Obama articulated a fairness principle known as the “Buffett Rule,” named after billionaire investor Warren Buffett, who disclosed that he pays a smaller percentage of his income in federal taxes than his secretary. The Buffett Rule holds that no millionaire should pay a lower effective tax rate than middle-class families.

On February 1, Sen. Sheldon Whitehouse (D-RI) introduced the Paying a Fair Share Act of 2012. The bill would turn the principle behind the Buffett Rule into a rule of the U.S. tax code, requiring that all households with incomes above $1 million pay at least a 30 percent minimum tax rate (with a phase-in for incomes between $1 million and $2 million).

Here are seven compelling reasons why we need a Buffett Rule.

1. The incomes of the top 1 percent have skyrocketed over the past three decades, nearly quadrupling and leaving middle-class incomes far behind. Rising inequality has meant that the very rich have captured an outsized share of the country’s economic gains.

Inequality on the rise Average after-tax income in constant dollars, 1979-2007

$1,319,700 1,400,000 $55,300

1,200,000 Middle quintile Top 1% 1,000,000

800,000

$44,100 600,000 $346,600

400,000

200,000

0

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: CBO

1 Center for American Progress | Why We Need a Buffett Rule: Seven Convincing Reasons 2. During these same years, tax rates on millionaires dropped sharply as a result of the Bush tax cuts and successive rounds of tax cuts on investment income (capital gains and dividends).

Overall federal income tax rates on millionaires, 1993-2009

35%

2001 30% First Bush tax cuts lower top marginal rates from 39.6% to 35% 1997 25% Capital gains tax rate lowered from 28% to 20%

2003 Second Bush tax cuts 20% accelerate rate cuts, reduce capital gains and dividend taxes to 15%

15% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Internal Revenue Service, Publication 1304.

3. A large number of millionaires are now paying lower taxes than millions of middle- class Americans.

Billionaire Warren Buffett pays a below-average tax rate ONE IN FOUR millionaires pays lower taxes than millions of average Americans. Average federal income tax rate vs. Buffett’s

35% 16%

14% 30% TAX RATE 12% 13.5% 25% 26.5% 10% 11.0%

8% 20%

6% 15% 4% 94,500 millionaires pay a tax 2% rate of less than 26.5 percent, 10% while 10 million Americans 0% who earn less than $100,000 Average federal income tax rate, Warren Buffett's tax rate on annually pay a tax rate 2005-2009 $62 million of income in 2010 5% greater than 26.5 percent.

Source: IRS Statistics of Income (2005-2009 average); Warren Buffett letter to U.S. Rep. Tim Huelskamp (Oct. 11, 2011), Source: Congressional Research Service (combining available at http://money.cnn.com/news/storysupplement/buffett-letter-to-huelskamp/. 0% income, payroll, and corporate taxes).

2 Center for American Progress | Why We Need a Buffett Rule: Seven Convincing Reasons 4. While many at the top continue to pay lower taxes than those below them on the income scale, the entire burden of deficit reduction falls on investments and services for the middle class.

The Budget Control Act, enacted in August 2011, includes:

• $1 trillion in cuts to government services and public investments (“discretionary” spending) over 10 years

• $1.2 trillion in additional across-the-board spending cuts, including defense and Medicare, starting in January 2013

• $0 in additional revenues

5. The Buffett Rule would raise significant amounts of revenue to address our budget challenges, while affecting a tiny percentage of people who can easily afford it.

• $73 billion: Additional revenue that the United States would have collected per year over the last three years if millionaires merely paid an average tax rate of 30 percent.

• 0.1 percent: Percentage of Americans that would pay more in taxes under the Buffett Rule.

• 2.2 percent: Average tax increase for these millionaire households.

Source: Authors’ calculations from IRS data, Tax Policy Center tbl. T12-0024.

6. The Buffett Rule enjoys broad, bipartisan support.

Majority of Americans favor Buffett Rule AP-GfK poll, February 2012

9%

14% Strongly Favor Somewhat Favor 50% Somewhat Oppose 12% Strongly Oppose Neutral/Don't Know 15%

Source: Associated Press and GfK, “The AP-GfK Poll, February, 2012,” p. 6, available at http://ap- gfkpoll.com/main/wp-content/uploads/2012/02/AP-GfK-Poll-February-2012-Topline_Congress.pdf

3 Center for American Progress | Why We Need a Buffett Rule: Seven Convincing Reasons 7. And that’s because the rule would restore fundamental American values.

“We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share. [These loopholes] sometimes made it possible for millionaires to pay nothing, while a bus driver was paying ten percent of his salary, and that’s crazy.” JUNE 6, 1985

“Now, you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.” JAN. 24, 2012

Seth Hanlon is Director of Fiscal Reform at the Center for American Progress.

See also: • Ronald Reagan, Father of the ‘Buffett Rule’ by Seth Hanlon and Michael Linden • Issue Pulse: Support for the Buffett Rule • Many Millionaires Do Enjoy Lower Tax Rates by Sarah Ayres

4 Center for American Progress | Why We Need a Buffett Rule: Seven Convincing Reasons