The Buffett Rule: The Coveter's Eyes Are Bigger Than The Gluttonous' Wallet

By Daniel Indiviglio

 

 This week, President Obama announced a new way for the government to make more money: put a floor on the tax rates that millionaires face. He coined the idea the "Buffett Rule," after billionaire investor Warren Buffett, who recently complained that he didn't pay enough taxes. Even though incomes are taxed progressively, so those making more money are supposed to pay more, capital gains -- like income from stock gains -- can escape those marginal rates. That's one way in which wealthier Americans enjoy lower tax rates than marginal rates would imply. 

So how much would the so-called Buffett Rule bring in? It's hard to say, because Obama didn't define precisely how it would work. But he did say it would create a tax rate floor for those who make more than $1 million per year. So let's use 2009 tax return data from the IRS to imagine some possible scenarios for how much additional tax revenue the new tax could bring in. Here's a chart: 

Let me explain what's going on here. I used IRS data for 2009* adjusted gross income (which I know isn't perfect, but it was the best they had). I then calculated the effective tax rate based on its data to be 29.1% for all Americans who earned more than $1 million. I consequently took the total income of the group and multiplied by different tax rates (as shown). I subtracted the taxes already paid (at the 29.1% effective rate) to figure out how much additional revenue they'd provide to the U.S. government at those new tax floors. 

As you can see, the short answer is: some, but not enough to make a dent in the deficit. If you put a floor at their current marginal tax rate of 35%, the government would obtain $37 billion more dollars. That might sound like a lot, but it amounts to just 2.5% of the 2009 $1.5 trillion deficit (which is the red line shown). If you increase the floor to the pre-Bush-tax-cut marginal rate of 39.6%, the additional revenue grows a bit -- to $66 billion, or 4.5% of the year's deficit. 

Even if you get really aggressive, it doesn't help much. Even a tax floor for these individuals at 75% would cover less than 20% of the year's deficit. And, of course, even most populist among us probably worries that a tax rate that high could do more harm to the U.S. economy than good. All of these calculations also assume that these wealthy individuals wouldn't find new and creative ways to ensure that their income was shielded from very high tax rates. (They would.)

So this Buffet Rule is a great populist proposal if the president wants to score some political points, but it has little practical value. It might provide the government a little bit of additional revenue, but unless extremely aggressive, it wouldn't make a dent in the nation's deficit problem. To do that, you'll need to cut entitlements and/or raise taxes much more broadly.

---

* A quick note: 2009 is actually a pretty generous year to consider for the potential impact of a Buffett Rule. The S&P 500 stock index increased by 24% during the course of the year, which implies that capital gains would have played a relatively significant role in boosting the incomes shown. So the effective tax rates actually paid were likely lower than they would have been during a year when stocks didn't perform as well.
---

Who's up for some bonus food for the eyes?