This is the season of the Buffett Rule. As tax filing day approaches, the Obama Administration has taken to plugging the proposal that income above $1 million be taxed at a minimum of 30 percent with the same frequency that ESPN plugs NCAA basketball coverage. There have been events at the White House with millionaires and their assistants, a speech, interviews with local media, and conference calls with reporters. Top officials have been dispatched to talk up the thinking behind the rule, including Alan Krueger, the chairman of the Council of Economic Advisers, who joined me yesterday.
The political rationale is obvious. I've suggested that the Buffett Rule, named after Warren Buffett, the folksy octogenarian billionaire who proposed the idea in the first place, be renamed the Romney Rule. The presumptive Republican presidential nominee has disclosed that he pays a low effective tax rate on his vast income of about 14 percent. He's one of the people who would be directly affected by the imposition of such a rule. And the candidates' different attitudes towards taxation — President Obama believes high-income earners are taxed too lightly while Romney believes they are taxed too heavily — will be a recurring issue through the next several months.
But what about the economic rationale for the Buffett Rule? Compared with other tax issues — the future direction of marginal rates, the fate of the payroll tax, the question of repatriation of overseas earnings of U.S.-based corporations — the Buffett Rule seems to be small beer. Assuming the expiration of the Bush-era tax cuts, it would raise an additional $47 billion in revenue, which is something of a drop in the bucket. And it will affect the relatively small number of high-earning Americans who get most of their income from investments rather than wages.
Krueger says there is solid economic rationale for the Buffett rule. "First and foremost, it will restore some fairness to the tax code," he said. The rule would be a step toward greater "vertical equity" and greater "horizontal equity." "Vertical equity says that those who are in a position to pay more should pay more," said Krueger. "It's the basic value of progressive taxation." By "horizontal equity," Krueger means that people who make the same amount of money should basically pay the same amount of taxes — regardless of the source of the income.
In addition, economists are big fans of efficiency. And the differential treatment of sources of income — one rate for wages, another for dividends, another for short-term capital gains — produces distortions. There's an entire industry devoted to helping the wealthy minimize taxes by restructuring their income, which adds little value to the economy as a whole. The wrinkles in the tax code also distort decision-making, Krueger adds. The mortgage-interest deduction, for example, has spurred lots of people to borrow huge sums of money to buy more expensive houses than they would if the tax code didn't favor such activity.
As for the charge that the Buffett Rule only raises $47 billion in additional revenues, Krueger says it has to be considered in context. "There are many proposals the president has made to bring the deficit under control," he said. "He believes this is part of a balanced approach with spending cuts and additional revenue."
In this day and age, every $47 billion counts.
Expect to hear much more of this conversation between now and November.
Daniel Gross is economics editor at Yahoo! Finance
Follow him on Twitter @grossdm; email him at email@example.com
- Warren Buffett
- Alan Krueger
- Obama Administration