What to Make of the President’s “Buffet Rule.”

What to Make of the President’s “Buffet Rule.”

The Buffet Rule

Earlier this month, the President proposed two complementary plans for economic growth and deficit reduction. On September 12, he released The American Jobs Act. One week later he released Living Within Our Means and Investing in Our Future. Both of these documents propose significant changes to the tax system. The goal of these changes is to make the tax system more progressive. (A progressive tax system means that people with higher income pay a higher percentage of that income in tax than those with less income.)

Most of the publicity regarding his plans focused on the “Buffet Rule.” President Obama stated:

“Any reform should follow another simple principle: Middle-class families shouldn’t pay higher taxes than millionaires and billionaires. That’s pretty straightforward. It’s hard to argue against that. Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it. It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”

So, is it true that millionaires and billionaires pay less tax than teachers, nurses and construction workers? Hardly. The Congressional Budget Office released reports (the most recent data coming from 2006) stating that the average effective tax rate for the top 1% of income earners was 31.2%. The top quintile (top 20%) of income earners (average of $248K per year) paid an effective rate of 25.8%. The middle quintile of income earners (those earning on average $60K per year) paid an effective rate of 14.2%, while the lowest quintile (average income of $16K per year) paid 4.3%. These rates include income taxes, social insurance taxes, corporate income taxes, and excise taxes.

The Tax Policy Center, a non-partisan group of nationally recognized experts in tax, budget, and social policy, projected the effective federal tax rates for 2012. Their 2012 estimates mirror the progressivity of the actual 2006 data provided by the CBO. The top 1% of income earners in their projections will pay an effective tax rate of 28.0%, the top quintile 25.5%, the middle quintile 14.1%, and the lowest quintile 1.6%.

Another way of measuring the progressivity of a tax system is by the tax burden born by a particular group. Again, according to the CBO, 1% of Americans pay 28.3% of all federal tax revenues. The highest quintile pays 69.3% of all federal tax revenues while the middle pays 9.1%, and the lowest pays 0.8% of all federal revenues.

So, the rich (those averaging around $250K per year) are paying nearly 70% of all taxes collected by the federal government at $0.25+ for every dollar they earn. In our opinion, the U.S. tax system is very progressive already.

The Tax Foundation, another non-partisan tax research group that has won praise from JFK to Milton Friedman, published an article earlier this year stating that the U.S. taxation system is the most progressive of industrialized nations. They cite a study that the top 10% of households in the U.S. pays 45.1% of all income taxes. This is above Norway (27.4%), Sweden (26.7%), Netherlands (35.2%), France (28.0%), and Germany (31.2%). Italy is the only other country in the survey where the top 10% of households pay more than 40%. The average for OECD countries is 31.6%. Greg Mankiw, a conservative economist professor at Harvard discusses this as well.

In conclusion, the United States has a very progressive tax system – one of the most progressive in the world. The rich in our country pay the majority of the taxes and at a much higher rate than the middle and lower classes. The Buffet anecdote that the President is making, even if it is true, is not representative of the system as a whole. Fore more information on the “Buffet Rule,” give us a call at (208) 356-8500.