President Obama unveiled his fiscal year 2014 budget proposal today, largely to the chagrin of progressives and conservatives alike. Many expected this proposal to be the opening position of a negotiation process, but in substance it appears that it is actually intended to entice conservatives back to the bargaining table by offering them a number of their preferred policies up front. Those policies included indexing social security benefits to chained CPI, a measure of inflation (see other explanations here and here) that would see benefits rising more slowly over time than they currently do (which the White House says would save about $230 billion over the next decade). One of the most widely discussed elements of the budget, though, is the proposal for what has been dubbed the "Buffett rule,"so named because Warren Buffett famously lamented that he paid a lower income tax rate than his secretary.
What is the Buffett rule? It is a proposed addition to the tax code that would stipulate that anyone who makes over $1 million per year (after deducting charitable contributions) would be subject to an additional tax such that their total tax contribution was 30% of their income. It's similar to the Alternative Minimum Tax (AMT) – indeed, the AMT itself originally had such a purpose, but was not indexed for inflation. This means that until it was finally indexed to inflation in the "fiscal cliff" deal, Congress needed to put in place an "AMT patch" that raised the threshold for this tax so it didn't create an unintended burden on the upper middle class. The proposed Buffett rule avoids this issue from the outset by indexing for inflation.
The motivation for the Buffett rule is the fact that many wealthy individuals pay surprisingly low income tax rates – this happens through a number of means, notably via investment. Capital gains (the gains associated with selling assets such as stocks or bonds at a higher price than what you paid for them) are taxed at 20% after 2012, compared with the top income tax rate of 35%. As a result, individuals receiving most of their income in this way pay taxes at a much lower rate.
How much revenue would it raise? While many critics cite a figure from Congress's Joint Committee on Taxation of $46.7 billion over ten years (a fairly small dent in overall deficits), this figure assumes the expiration of the Bush tax cuts. In this scenario, many more millionaires would already be paying income taxes of over 30%, and thus the Buffett rule would raise less money. In fact, the same committee released another report six days later, which estimated the revenue raised by the Buffett rule if the Bush tax cuts are maintained – in this case, the figure is $162 billion. This is a much more substantial sum.
Whether this is the most effective way to raise more money from the nation's wealthiest is up for debate. Many experts advocate further simplifying the tax code by taxing capital gains as regular income, for example. Polling, however, seems to show broad support for the Buffett rule. Either way, it looks like the White House is facing yet another budget tussle, despite a relatively conciliatory initial offering.