Beyond the Buffett Rule

AP Photo/Pablo Martinez Monsivais

Debbie Bosanek, left, assistant to billionaire investor Warren Buffet, inspired the so-called Buffett Rule to tax income from investments at higher rates.

Imagine you didn't know anything about President Barack Obama's potential opponents, and someone asked how Obama would do facing a former private-equity baron who made a fortune buying and selling companies, sometimes ruthlessly so. Also, this candidate hasn't held a job in five years, yet he still manages to "earn" around $20 million a year, on which he pays less in taxes than most Americans who work for a living. At a time when the country has become concerned about increasing inequality and the lack of opportunities for Americans who don't start life at the top, that candidate would seem like just about the ideal opponent.

And it wouldn't hurt if that candidate were also stiff and robotic and had gone through so many changes of position in his political career that it was apparent to all that he was the most craven and opportunistic of politicians. Put this all together, and I have little doubt that as long as the economy continues to improve—even if that improvement is slower than we'd like—the Obama campaign will not have much trouble beating Mitt Romney to a pulp. What may be more worrisome, however, is whether they'll squander the opportunity to do so in a way that sets the stage for some meaningful economic change in a second Obama term, particularly on the subject of taxes.

The biggest news of the last few weeks was the release of Mitt Romney's 2010 tax return. There wasn't much scandal there (apart from some notable but hardly illegal offshore accounts in places like Switzerland and the Cayman Islands), but it did offer a vivid reminder of how different the rich are from you and me. Accounting for all of Romney's varied holdings required a return 203 pages long, and as Romney himself admitted prior to the release, he pays a federal tax rate below 15 percent. "I pay all the taxes that are legally required and not a dollar more," he said in a debate last Monday. "I don't think you want someone as the candidate for president who pays more taxes than he owes." It was something of an odd argument to make, but I suppose in Romney's world, failing to have your accountants take advantage of every last tax loophole makes you a contemptible sucker.

What Romney doesn't seem to get is that the attention given to income inequality and his wealth in particular isn't, as he charged, about "envy." It also isn't because people think he did something wrong by taking advantage of the fact that the tax system is tilted in favor of people like him. It's because of that system, and the principles embodied in it. Unfortunately, President Obama had the chance to make the election a meaningful referendum on that tax system in his State of the Union address, and he whiffed.

It looked promising when Obama invited a woman named Debbie Bosanek to sit in the audience for the speech. For some time, billionaire investor Warren Buffet has been noting that he pays a lower tax rate than his secretary (that's Bosanek), and arguing for changes to the tax code to alleviate that inequity. The reason is that the current code taxes investment income—dividends, capital gains, and the like—at low rates that max out at 15 percent, while it taxes wage income (the money you make for working) at higher rates that max out at 35 percent. As you go up the income scale, people tend to make more and more of their money from investments. That's why someone like Mitt Romney, who makes millions from his investments, pays such a low rate.

So with Bosanek looking on, Obama proposed the following: "Tax reform should follow the Buffett Rule. If you make more than $1 million a year, you should not pay less than 30 percent in taxes." In other words, we'll take the current complex system and add to it another layer of complexity, in effect a new Alternative Minimum Tax, to impose a special rate on those with incomes of more than $1 million. At first blush, it appeals to common sense and fairness. But even if you ignore the fact that it stands zero chance of ever getting through Congress, the proposal bypasses the central question raised not only by Buffett but also by Romney's taxes: Why should we treat different income differently?

Doing so would mean reforming the tax system in a way that makes it simpler and fairer, reduces the ability of the wealthy to move their income around and evade taxes, and is easy for the public to understand. It's this: Treat all income the same. Tax it all according to the same rate schedule. A dollar is a dollar, whether you got it from your labor or your inheritance or your hedge-fund fees or your stock sales. It isn't the only thing we could do to improve the tax code, but it would be the most transformative, and it expresses a principle that few would be able to argue against.

This is something we could have a real debate about, and it could form the basis of significant tax reform in Obama's second term. He's already done many of the big things he promised when he ran in 2008, including passing a universal health-insurance plan and ending the war in Iraq. This kind of tax reform gives him the opportunity to create change that would affect the country in a positive way for decades to come. From a political standpoint, a proposal to tax all income equally brings up a fundamentally different set of questions than the ones we are now asking. Instead of asking, "Should the rich pay more?" we'll have to ask, "Why should the rich pay less than the rest of us?" That brings all Americans into the question and puts the focus on the inequities of the current system.

I'd like to see Mitt Romney—and any Republican, for that matter—be forced to answer this question: Why should investment income be taxed at a lower rate than income people work for? Wouldn't it be simpler and fairer to tax all income the same? If you want to portray the Republicans as the protectors of the privileges of the wealthy, just think how they'll squirm.

No one in either party took Obama's proposal for a 30 percent tax on million-dollar incomes seriously. So it's not too late to start campaigning for a more fundamental change to the tax code, one that would be right on both political and substantive grounds and would help set a real agenda for the president's second term. With the election heating up, the public is more attentive than they are at any other time. It would be a shame to miss the opportunity.

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