The Weakness of the Buffett Rule

Now that America's burning hunger for Mitt Romney has overflowed, and he really is the Republican nominee-to-be, the Obama campaign must settle on its anti-Romney strategy. Or more properly, they will reveal to us the anti-Romney strategy they settled on many months ago. One central component will be an argument about taxes, contrasting Obama's approach with the Republican one, and the cornerstone of that argument looks to be the "Buffett Rule." Which is kind of unfortunate. The Buffett Rule is, I'm quite sure, good politics. Believe you me, the Obama campaign wouldn't be going whole-hog on it if they hadn't already polled and focus-grouped it within an inch of its life. What it isn't is particularly good policy. The fairness principle at play—that rich people shouldn't pay lower tax rates on their income than the rest of us—is perfectly sound. The problem is the way they've decided to implement that principle.

I use the term "implement" loosely, because the chances that the Buffett Rule is enacted into law in its current form are pretty low. But in the form in which it's being proposed, it would require that anyone with an adjusted gross income (that means after deductions) of more than $1 million a year would pay a tax rate of at least 30 percent. Of course, many people earning that much already do pay that much in taxes, if they get their income from things like salaries. The people the rule would hit are those like Buffett (or like another very rich guy, whom we'll get to in a moment) who make most of their money through investments, and therefore pay the lower capital-gains rate, which tops out at 15 percent.

As Patrick pointed out the other day, the proposal is pretty modest—not only doesn't it impose some kind of extra-high tax rate on the wealthiest Americans, it doesn't even mandate that they pay the current top rate, which is 35 percent. But the reason it's bad policy is that instead of a genuine reform of the tax system, it just adds on another layer of complexity. As I've argued before, the far better path would be to propose taxing all income the same, whether it comes from wages or investments or hedge-fund fees or inheritances. That would be simpler and fairer, and accomplish the same thing the administration is seeking. The Buffett Rule, on the other hand, leaves the existing intricate patchwork in place, then adds a new requirement on top of it. And unlike taxing all income the same, the Buffett Rule could be subject to all kinds of rhetorical and substantive amendment. What if we set the income number at $5 million, or $10 million? What if we set the rate at 28 percent, or 32 percent? The debate could easily get lost in the weeds.

So why has the administration settled on the Buffett Rule as its main tax proposal? I'm guessing part of the reason is that they got so enthralled with the fact that America's most successful investor is on their side that they believed they had to use him in the most direct way possible. The basic story underlying their case—Warren Buffett pays a lower tax rate than his secretary—is a compelling concrete example of the problem they want to rectify. They could have just proposed taxing all income the same and called that "the Buffett Rule," but maybe that never occurred to anyone.

And it just happens that Mitt Romney is another large beneficiary of the current system, which means they can personalize this argument during the campaign. It will be a tale of two men, the rich guy who pointed out how unfair the system is, and the rich guy running for president so he can keep his own taxes low.

I remain hopeful that meaningful tax reform could occur during a second Obama term, even as I doubt that the Buffett Rule will ever get passed through Congress so long as Republicans draw breath. But it would be nice if the administration would use the campaign to lay the groundwork for the right kind of change.

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