President Barack Obama’s proposed “Buffett Rule,” which would impose a minimum 30 percent tax rate on individuals earning $1 million or more  a year certainly makes for good politics. It capitalizes on the envy, resentment and visceral anger that is so often aimed at the richest members of our society. But if there’s anything I’ve learned as a student of political economy, it’s that good politics almost invariably equals bad economics. The Buffett Rule is no exception.

First, let’s talk about the idea that rich people aren’t paying their “fair share” of taxes. According to the Congressional Budget Office, the richest 1 percent of Americans face an average tax rate of 29.5 percent and pay 28 percent of all federal taxes. Meanwhile, the bottom 40 percent of American households have averaged a federal income tax rate below zero since 2000, according to The Atlantic.

The fact is that rich people pay a lot of taxes. Nonetheless, there persists a widespread belief that they still aren’t paying enough. Much of the confusion in this respect stems from Warren Buffett’s proclamation that he pays a lower tax rate than his secretary, who, for the record, earns somewhere between $200,000 and $500,000 annually, according to Forbes.

It is true that the relatively few individuals in this country who earn income solely from long-term investments face a lower top rate than those who pay taxes on ordinary income streams. While individuals who pay taxes on ordinary income face a top marginal rate of 35 percent, those who pay taxes on long-term capital gains are taxed at a maximum rate of 15 percent.

At first glance, this may strike you as being tremendously unfair. After all, why should super-rich investors like Buffett pay a lower tax rate than many middle-income Americans? The only thing is … they don’t. For one thing, the capital gains tax is a tax on the present discounted value of a company’s future profits. This makes it a double tax because it is being applied to profits that, when earned, will also be subjected to the corporate income tax.

Additionally, long-term capital gains are unique in that they are not indexed to inflation. This means that investors can and often do end up paying taxes on income increases that are purely nominal, which means that they do not represent an increase in actual purchasing power. As former Federal Reserve Board member Alan Blinder once noted, “most capital gains … simply represented the maintenance of principal in an inflationary world.”

It is also important to bear in mind that investors like Buffett aren’t paying a 15 percent rate on income they picked from the money trees in their backyards. You generally have to earn income before you can invest it, which means Buffett and investors like him are paying a 15 percent tax rate on investment yields to income on which they already paid the top marginal rate.

Now that I’ve addressed Obama’s fairness claim, I’d like to address his argument that the Buffett Rule will help to reduce the federal government’s fiscal deficit. This cockamamie argument is utterly laughable on its face and ultimately highlights the fact that this policy proposal is nothing more than a cheap political ploy.

According to the Joint Committee on Taxation, if implemented, the Buffett Rule would increase federal revenues by roughly $47 billion over the next decade. This may sound like a pretty big number, but in actuality it’s not even a drop in the bucket. As the Wall Street Journal points out, this amount would barely cover 0.5 percent of the president’s proposed budget over the same time period.

President Obama has proposed a $3.8 trillion budget for 2013 alone. This means Warren Buffett’s entire net worth of $44 billion wouldn’t even get us through the first five days of the fiscal year! The fact is, if the federal government is serious about getting its fiscal house in order, it will need to drastically cut spending and reform our entitlement programs, not simply raise taxes on the 0.02 percent of filers to whom the Buffett Rule would apply.

If anything, history suggests that lowering the capital gains rate would help the federal government reduce its fiscal deficit. As Wall Street Journal Editor Stephen Moore points out, after the capital gains tax rate was cut by 8 percent in 1981, real federal revenues from the tax increased by more than $7 billion over the following two years. When the rate was cut again in 1997, revenues from the tax rose by nearly $50 billion over three years.

One final point I would like to make is that a low tax rate on long-term capital gains is beneficial not only for rich Americans but for middle-class and poor Americans as well. A high capital gains tax rate penalizes investment and risk-taking, thereby inhibiting long-run growth and job creation. By contrast, a low capital gains tax rate encourages higher levels of investment and risk-taking, thereby spurring innovation, real wealth creation and job growth.

It is a matter of fact that increasing taxes on a scant number of millionaires will do nothing to resolve Washington’s fiscal woes or stimulate our economy. If anything, the Buffett Rule would likely reduce real federal revenues while inhibiting long-run investment and job creation. Clearly this policy proposal was never really about reducing the deficit or stimulating economic growth, nor was it about achieving a greater degree of economic “fairness.”

The purpose of the Buffett Rule has always been to feed into the illusory notion that taxing the wealthy will solve all of our economic problems. It has been to divert our attention away from out-of-control government spending by redirecting that attention towards the investment yields of the risk-takers and job-creators on whom the future growth of our economy depends.

President Obama might think he can win your vote by convincing you that wealthy investors aren’t paying their fair share or that the Buffett Rule will somehow spectacularly manage to get our economy back on track. I implore you not to fall for this ruse and to instead put the pressure back on both political parties to reduce spending, reduce taxes and reform our entitlement programs. Mulcting the rich is easy; implementing smart and substantive reforms is tough. But ultimately, the latter is what’s needed to get our economy going strong.





  1. You are seriously cherry-picking the facts. Yes the 1% pay 28% of fed taxes but that’s because they make so much!,- what they pay in taxes is more then what most make in a year! Bottom line- they shouldn’t pay less taxes than the middle class who are the real job creators, and actually move the economy. The rich evade taxes and keep their money high, while the middle funds and contributes to the middle economy. I.e. facebook CEO who’s no longer a US citizen to evade taxes. It’s not jealous or anger, its pure facts and sensibility that the rich shouldn’t be able to pay a lower percentage in taxes than the rest of us.

  2. jcarn says:

    Falsehood 1. Its bunk the bottom 40% pay no taxes–they pay Social Security and Medicare taxes (FICA) taxes that make up a larger portion of their paycheck than rich people do. 
    Falsehood 2. All of a sudden if we just cut enough government spending all of a sudden “investors and risk takers” will thrive—THIS HASN’T WORKED IN EUROPE! 
    Falsehood 3. The president has ANYTHING to do with economic activity–THIS IS THE STUPIDEST FALSEHOOD OF ALL!!!! Economic conditions are set by a variety of factors mostly outside of control of President.
    Falsehood 4. That we can be moved out of this “economic malaise” by “risk takers” under this current market/compensation structure–Facebook employs 3500 people AND THEY ARE A SUCCESS STORY!!!
    Falsehood 5. There has been no successful tie between long term capital gains rate and “success of country”–you are just pulling anecdotal stuff out of thin air. 
    Falsehood 5. That all government spending is bad–you know those student loans you apply for every semester–the United States government has decided that it is important that we fund higher education so you know, we don’t fall behind China (that sends their kids to school for free). This is a partnership between the state (that funds a part of in-state tuition) and the federal government (that allows you to borrow the rest at below market rates). 
    Falsehood 6. President has “declared war on the rich”.
    If anything through CNBC, Fox and funding Super PACs, I would say the opposite is true. Mentioning that income inequality does not go hand in hand with sustainable economic growth and that “some banks did some improper activity” isn’t berating them–its just a fact.
    Falsehood 7. That EVERYTHING will just be perfect once Mitt Romney is elected!!! Yah, businesses are not hiring because THERE IS NO DEMAND!! Yes lets raise taxes on 40% of the population that already have problems paying their bills–because if we cut taxes for the top 1% and raise them for 40% that the spending of the 1% will more than offset that 40%–this is a huge fallacy that is going to lead us to a really, really, really huge recession–it is going to be much worse for DC metro area that depends on federal government spending.