Buffett Rule Exposed as Popular Fraud

The Tax Policy Center, a nonpartisan research group, has estimated that the average tax rate, including payroll taxes, for the middle 20 percent of U.S. families will be 15.9 percent by 2015. Of the 217,000 families that will be affected by the Buffett rule, 4,000 will have incomes exceeding $1 million and tax rates below 15 percent. So, according to the Tax Policy Center estimate, less than two percent of the families affected by the Buffett rule will have tax rates below that of the middle 20 percent of families. Roberta Williams, a senior fellow at the Center, says: “The taxes paid by middle-class families are a lot lower than we think they are.”

Democratic lawmakers and Democratic Party officials have largely embraced President Barack Obama’s embrace of the Buffett rule, by which millionaires and their billionaire betters would pay at least a 30 percent tax rate. The 30 percent standard is designed to make sure that the very wealthy pay a higher income tax rate than do any members of the middle-class. The Buffett rule will have no effect on those with six-figure incomes.

President Obama is touting the Buffett rule as a deficit-reduction measure but it is projected to raise just $47 billion in revenue over ten years, a relative pinprick on the deficit.

It is the case that beginning with Ronald Reagan, the top marginal tax rate was significantly reduced and then George W. Bush drastically shifted the federal income tax burden down to those lower on the economic totem pole by granting the few percent of the nation’s wealthiest people the lion’s share of two major tax cuts. From World War II to the Reagan 80s, the top marginal tax rate varied from 70.45 to 91 percent and the bottom marginal tax rate varied from 14 to 20 percent. The period after World War II was a time of great economic prosperity and the tax rate structure was generally accepted as fair because so many people were doing well, and those who were not were not doing so due to high taxes.

There is little doubt that the very high top marginal tax rates were a major factor in maintaining a more equitable distribution of wealth and income in the united States, because there was less opportunity for the high earners to accumulate wealth. However, attention on who should pay what share of the federal income tax should not be focused so centrally on the wealthiest Americans. Generally speaking, when it comes to the federal income tax, under-taxing is nearly universal, illustrated most clearly by the IRS conclusion that in the last year for which data is fully available, only 53 percent of U.S.households paid any federal income tax. Those who try to rationalize away the fact that nearly half of households pay no federal income tax by arguing that they pay sales tax, property tax and many other kinds off taxes, overlook the obvious fact that those who pay federal income tax also pay these other taxes. What is needed is an income tax system that results in a higher percentage of households paying a tax; increases the taxes of the middle-class and the near-wealthy; and causes the wealthy to pay not “a little bit more” as President Obama likes to phrase it, but a substantial additional amount.

In a much earlier blog, I proposed a tax system with the following major features: 1) tax rates ranging from 16 to 60 percent — Robert Reich would make the top rate 70 percent; 2) tax capital gains at the same rate as regular income; 3) cut in half the too-generous child care credit; and 4) tax corporations under the provisions in effect in the Eisenhower years, when corporations provided a much larger share of national government revenue. Eliminating the current 10 and 15 percent tax rates and cutting in half the child care credit would increase the percentage of households paying some federal income tax.

The heavily promoted Buffett rule has a “feel good” effect, because the tax code will be a little fairer in many people’s minds. The real danger of the Buffett rule is that it will slow any momentum that has been built up, especially through the Occupy Movement, to have a progressive federal income tax structure, with a much higher top marginal tax rate. The best we can hope for from President Obama is that he restore the 39.6 percent top marginal rate by having the Bush tax cuts expire. Given that recent signs of an economic slowdown may mean that at the end of 2012 we may be in an economic situation reminiscent of the  end of 2011, Obama may feel compelled to ask for a similar tax package. The likely GOP price would be another extension of the Bush tax cuts.

The Buffett rule should be jettisoned and a new taxation structure enacted, along the lines outlined above.

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