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January 30, 2012

Whitehouse to Introduce Buffett Rule Legislation on Wednesday

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Sen. Sheldon Whitehouse plans to introduce the “Paying a Fair Share Act” on Wednesday. The bill follows the contours of what President Obama laid out as “the Buffett rule” in his State of the Union address. The bill would set a second alternative minimum tax for millionaires, essentially, at 30%. So after taxpayers with over $1 million in income, including capital gains and dividends, work out their taxes, they would have to pay an effective tax rate of either 30% or the result of their taxes with deductions, whatever is higher. The bill would “preserve the incentive for charitable giving,” so presumably charitable donations would be made exempt from this rule, which could perhaps spur lots of charitable giving rather than handing over more money to the government.

Whitehouse’s next step, according to aides, is to refer the bill to the Joint Committee on Taxation for a score on how much revenue this would raise. A preliminary score from Citizens for Tax Justice showed that the Buffett rule would raise $50 billion annually – so well over half a trillion in the 10-year budget window – and hit only 0.08% of all taxpayers. So this is a bill not for the 1%, but the 0.08%. For context, letting the Bush tax cuts expire for the top 2% generates about $800 [billion] over ten years. So this rule change would actually add at least $500 billion on top of that, because the CTJ analysis assumes current law.

This is not a small number; in fact, you’re talking about tax changes that would bring in $1.3 trillion, minimum, in the budget window. CTJ also assumed that the tax would phase in between $1 million and $2 million to avoid a “cliff” between $999,999 and $1,000,000 on the effective tax rate. So a less gradual phase-in would take in more money.

Josh Barro of the Manhattan Institute predictably argues this would result in bad policy.

Preferential treatment for capital gains isn’t an idea that the Republican congress invented in the 1990s. It has been a feature of the United States tax code for more than eight decades and is also present in substantially every other advanced country’s tax code. In every G7 country, even the taxpayers with the highest incomes pay capital gains tax at a significantly lower rate than on ordinary income.

The United States has had a preferential rate on capital gains almost continuously since 1922, when it was determined that a top rate of 73 percent was discouraging gains realizations.

So, a Buffett Rule would not simply mark a return to a time when tax burdens were higher on people with high incomes. It would entail enacting a new form of tax policy not used in other major countries and not used for any sustained period in the United States. It is very cavalier to contend that such a policy would not discourage investment.

It’s not cavalier at all. First of all, 30% is not 35%. Second, there is simply no economic analysis that shows a correlation between capital gains tax rates, or the difference between investment and ordinary income, and economic growth. It doesn’t really exist. I agree that the US has had a preferential rate on capital gains for a long time, but that’s a feature of the United States, not an argument for the superior nature of that preferential rate.

(I would consider just raising the capital gains tax rate, a large driver of inequality, rather than this Buffett rule thing, but the larger point stands.)

Simply put, the tax code has gotten completely out of balance as it relates to progressivity. Because of the generally regressive nature of state taxes, the income tax at the federal level needs to be more progressive. And the facts are that the code has been twisted so much that the richest 400 Americans in the country in 2008 paid an average effective tax rate of 18.2%. This is a problem that the country needs to solve, among other problems with the tax code.

UPDATE: I actually couldn’t cover this conference call from Whitehouse this morning as I was attending to other matters, but Greg Sargent has you covered.

UPDATE II: I take Barro’s point on inflation and indexing as it relates to capital gains taxes, but even he acknowledges that this is a problem with taxation generally, and not one we really upend our entire tax system trying to fix, nor should we in my view. I’m pretty sure wealthy interests ALREADY fear inflation to a significant degree, and push the Fed to manage inflation far more deliberately than their employment mandate. I don’t think this pushes us over any edges.

UPDATE III: So far, cosponsors on this legislation are Akaka, Begich, Leahy, Harkin and Blumenthal. So it’s a little less advanced than I expected.

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