An Analysis of the “Buffett Rule”

Thomas L. Hungerford
Specialist in Public Finance

Warren Buffett, the chairman of Berkshire Hathaway, noted that he paid 17.4% of his taxable income in income and payroll taxes—“a 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 rule”—“no household making over $1 million annually should pay a smaller share of its income in taxes than middleclass families pay.” In October 2011, 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. On March 22, Senator Whitehouse introduced a bill to reduce the deficit by imposing a minimum tax on high-income taxpayers (S. 2230). 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 moderateincome 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 highincome 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.


Date of Report: March 28, 2012
Number of Pages: 14
Order Number: R42043
Price: $29.95

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