As everybody knows by now, Warren Buffett — class traitor — pays a smaller share of his income in taxes than does his secretary, Debbie Bosanek. In his State of the Union address last month, President Barack Obama proposed the “Buffett Rule” to rectify this.
The rule would be a phased-in requirement that all taxpayers making more than $1 million a year pay federal taxes of at least 30 percent of their adjusted gross incomes. If your taxes worked out to be less than that, you would owe Uncle Sam the difference.
Who could object? Well, Newt Gingrich — class clown — called the idea “stupid.” And Mitt Romney — class president — said he doesn’t believe in raising taxes on anybody under any circumstances: a nice, nuanced view, which at least saves us the trouble of arguing about it. It’s really impossible to defend a system where people at the bottom pay 30 percent or 35 percent (including Social Security and Medicare taxes) while people at the top who’ve arranged their affairs correctly — not all that hard — pay 15 percent, as Romney did last year. Nevertheless, there are problems with the Buffett Rule, which would become law under a bill introduced Wednesday in Congress.
First, it will affect so few people that it will have no measurable effect on income distribution. Citizens for Tax Justice, a liberal tax reform group, figures that the Buffett Rule would affect about 0.08 percent of taxpayers, or one out of every 1,250. People will be tempted to think that by enacting the Buffett Rule, we will have solved the problem of growing income inequality, when we won’t really have even touched it.
The Top Half
What about people making $500,000? Don’t they need to kick in something, too? The median family income in this country is about $50,000. That means if two people in your family are working and they bring in a total of more than $50,000, you’re in the top half. Any redistribution through the tax system for the purpose of reducing inequality will increase your taxes, not reduce them.
Democratic politicians can be eloquent about the struggling middle class. But the truth is that the middle class is where a big chunk of the money is, and there is no way that the middle class can redistribute money from itself to itself. In this country, all people, rich and poor, have the right to think of themselves as middle class. But when representatives of the middle class sit down to divvy up the spoils of redistribution, they will be disappointed.
Actually, in the past few months, the invisible line that divides the middle class from the rich in the public’s imagination has moved dramatically upward. It used to be $250,000. That was the amount of income below which Obama promised no tax increase. Now, thanks to the publicity around the Buffett Rule, it’s a cool million.
These days it takes so much energy and so many chits to enact any major piece of legislation that it’s hard to believe Congress will pass two tax reform laws in the same year. Enacting the Buffett Rule will absolve members of any concern about the current tax system, and prevent more wide-ranging reform. Meanwhile, for those who are (or might be) affected by the Buffett Rule, it will be an added complication. People will have to compute their taxes twice: once under the regular rules and again under the Buffett Rule — and then they will have to pay the higher of the two.
The Buffett Rule would just paper over mistakes in our tax system that ought to be fixed. Let’s be clear: The reason that many millionaires pay so little income tax is that Republicans in the White House and the Congress wanted it that way. The last major tax reform, in 1986, equalized the tax rate on all forms of income: working wages, capital gains and dividends. This had the support of President Ronald Reagan and most Republican members of Congress.
Republicans have been campaigning on Reagan’s success (although it wasn’t really his) ever since, while also undermining the reform’s most important accomplishment. As part of George W. Bush’s tax cut of 2003, the tax rate on dividends and most capital gains was capped at 15 percent. (Immediately after the 1986 reform, it was 35 percent.) Rather than creating a whole new set of rules for about 100,000 taxpayers, that cap should be abolished. Income is income. That would be real reform.
The biggest challenge for whoever is president the next four years will be convincing Americans that we must pay more taxes. Every realistic and honest person concedes that a tax increase will be necessary to get us out of the hole we’ve dug. (Yes, yes, spending must be reined in too, and yes, yes, we don’t need to start until the recession is indubitably over.) But it can’t just be a tax on Warren Buffett and his peers. It will have to be a tax on you. The Buffett Rule makes that a harder sell.
A tax on so few people also undermines the message that taxes are not a reflection of animosity. President Obama doesn’t hate the rich. This isn’t class war. Nobody thinks that the rich are inherently evil, or that anyone who makes it in America must be a crook. Obama was careful to say all this in his State of the Union. But he segued smoothly from his discussion of financial improprieties to his discussion of the Buffett Rule, making it sound more like a punishment for misbehavior than he may have intended.