Buffett Rule - Explained
What is the Buffett Rule?
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Table of ContentsWhat is the Buffett Rule?How Does the Buffett Rule Work?Buffett Rule CriticismThe Impact of the Buffett RuleKey TakeawaysAcademics Research on Buffett Rule
What is the Buffett Rule?
The Buffett Rule refers to a share of tax proposed in 2011 by the former U.S. president Barack Obama. The term Buffett Rule is named after a U.S. billionaire investor known as Warren Buffett. Buffett was concerned why a wealthy person like him would pay less federal tax than that of his employees like the secretary. In 2011, Buffett openly stated that it was unfair for rich people like him to pay less federal tax, while middle-class people were paying more. For this reason, Buffett proposed and supported the idea of increasing wealthy people's income tax. Senator Harry Reid later proposed a 5.6 percent increase on every person who makes $1 million dollars a year. The Buffett Rule is generally against the unfair tax system being practiced in the United States. The rule intends to put more tax burden on investment income than it does on the income of middle-class earners. Therefore, the main purpose of coming up with the Buffett Rule is to try and mitigate the bias that exists in the federal tax payment system. Note, that the rule later led to the creation of legislation called Paying A Fair Share Act. The initial introduction of this legislation was done in 2012 by Congress. However, the act has been rejected several times. In other words, there has been a subsequent rejection of this bill by congress.
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How Does the Buffett Rule Work?
The Buffett Rule affects only those taxpayers who get most of their income from hedge-fund partnerships or investment. Such taxpayers are usually taxed 15%, and the rule would make them pay even more. Note that the BuffettRule does not affect millionaires who earn the majority of their income from salary.
Buffett Rule Criticism
Buffett Rule has received a lot of criticism from tax experts. Those criticizing this rule argue that the rule of increasing tax on capital earnings is going to negatively affect business growth. However, those who support the Buffett Rule are positive that if passed, it will eliminate the existing tax loopholes. They are also positive that with Buffett rule in place, it is set to reduce the tax burden of middle-class taxpayers. In the long run, it will ensure that wealthy people also pay a big share of tax from their income just as middle-class earners do.
The Impact of the Buffett Rule
In general, the Buffett Rule will affect several individuals the moment it is effected. Some of the effects are explained below:
- According to tax experts, the implementation of the Buffett Rule will lead to additional tax revenue. The increase in revenue is estimated to move from $36 billion to somewhere around $50 billion every year.
- Secondly, the Buffett Rule will bring changes to in investment-related tax. According to experts, things such as a bond, stock, and real estate markets are going to be negatively affected. For this reason, investors will be forced to make adjustments to their portfolios in order to mitigate effects related to tax increment.
- Also, if the Buffett Rule is implemented, it will relieve middle-class earners from the heavy tax burden imposed on their salaried income.
- The Buffett Rule refers to a share of tax proposed in 2011 by the former U.S. president Barack Obama.
- The term Buffett Rule was named after a U.S. billionaire investor known as Warren Buffett. Buffett was concerned why a wealthy person like him would pay less federal tax than his employees such as his secretary.
- The main purpose of creating the Buffett Rule is to help mitigate the biases that exist in the federal tax payment system.
- The Buffett Rule affects only those taxpayers who get most of their income from hedge-fund partnerships or investment and not the salaried millionaires.
Academics Research on Buffett Rule
- [PDF]Taxesand the economy: An economic analysisofthe toptaxrates since 1945 (Updated), Hungerford, T. L. (2012). Taxes and the economy: An economic analysis of the top tax rates since 1945 (Updated). Advocates of lower tax rates argue that reduced rates would increase economic growth, increase saving and investment, and boost productivity (increase the size of the economic pie). Skeptics of this view argue that higher tax revenues are necessary for debt reduction, that tax rates on high-income taxpayers are too low (i.e., they violate the Buffett rule), and that higher tax rates on high-income taxpayers would moderate increasing income inequality (change how the economic pie is distributed across families). This report attempts to explore whether or not there is any evidence of an association between the tax rates of the highest income taxpayers and economic growth. The analysis in this report does not provide a comprehensive model to examine all the determinants of economic growth. Data are analyzed to illustrate the association between the tax rates of the highest income taxpayers and measures of economic growth. [PDF]
- An analysisofthe Buffett Rule, Hungerford, T. L. (2011). An analysis of the Buffett Rule. Warren Buffett, the chairman of Berkshire Hathaway, noted that he paid 17.4% of his taxable income in income and payroll taxesa lower percentage than was paid by any of the other 20 people in his office. He stated that the mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. Within a month, the Obama Administration unveiled a plan for economic growth and deficit reduction. The Administration stated that one of its principles for tax reform was to observe the Buffett ruleno household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. On October 5, Senator Harry Reid introduced the American Jobs Act of 2011(S. 1660), which contains a 5.6% surtax on millionaires to pay for the provisions of the jobs bill. This report examines the Buffett rule, but uses a measure of income that captures the ability to pay taxes and incorporates the effect of the corporate income tax in addition to the individual income tax and the payroll tax. The results of this analysis show that the current U.S. tax system violates the Buffett rule in that a large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers. Roughly a quarter of all millionaires (about 94,500 taxpayers) face a tax rate that is lower than the tax rate faced by 10.4 million moderate-income taxpayers (10% of the moderate-income taxpayers). Tax reforms that are consistent with the Buffett rule would likely include raising tax rates on capital gains and dividends. For example, the President has proposed allowing the 2001 and 2003 Bush tax cuts to expire for high-income taxpayers and taxing carried interests of hedge fund managers as ordinary income as tax reforms that observe the Buffett rule. Research suggests that these tax reforms are unlikely to affect many small businesses or to deter saving and investment.
- Defending the one percent, Mankiw, N. G. (2013). Defending the one percent.Journal of Economic Perspectives,27(3), 21-34. Imagine a society with perfect economic equality. Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, J. K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies. The new product makes the entrepreneur much richer than everyone else. How should the entrepreneurial disturbance in this formerly egalitarian outcome alter public policy? Should public policy remain the same, because the situation was initially acceptable and the entrepreneur improved it for everyone? Or should government policymakers deplore the resulting inequality and use their powers to tax and transfer to spread the gains more equally? In my view, this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades. Since the 1970s, average incomes have grown, but the growth has not been uniform across the income distribution. The incomes at the top, especially in the top 1 percent, have grown much faster than average. These high earners have made significant economic contributions, but they have also reaped large gains. The question for public policy is what, if anything, to do about it.
- More chipsfor taxreform, Rattner, S. (2012). More chips for tax reform.The New York Times, SR12.
- Playing fair: Distribution, economic growth, and fairness in federal and statetaxdebates, Henchman, J. D., & Stephens, C. L. (2014). Playing fair: Distribution, economic growth, and fairness in federal and state tax debates.Harv. J. on Legis.,51, 89.