Buffet Rule Gives Americans What They Want: Higher Taxes on the Super Rich

A large majority — or what the Senate would call a "supermajority" — of Americans really want to raise taxes on wealthy folks: 65% say that taxes on people with incomes of $1 million or more should go up. The Buffett Rule would be a relatively simple and effective way of doing this. 

That's because most wealthy folks earn their incomes through capital gains, while hedge fund managers can treat their managerial fees as "carried interest," which are taxed at capital gains rates (a maximum of 15%). Income that comes from work, on the other hand, is taxed at much higher rates. 

In addition, wealthy Americans tend to earn more money from investments than poor and middle class Americans. This explains why Mitt Romney and Warren Buffett get to pay tax rates less than many middle income folks who derive most of their income from work. 

To be sure, there are some good reasons to tax capital income at lower rates than income from work. Spending on capital theoretically produces increases in productivity and therefore wages. However, there is less evidence that this is how things work in practice. 

Conservatives deny that wealthy folks really do get taxed at these rates. Overall, that's true, but some wealthy elites, like hedge fund managers, use these loopholes to escape higher rates. The evidence suggests, for example, that from 2004 through 2008, around 30% to 40% of the top 400 income earners paid effective tax rates less than 15%. In 2008, three out of four paid less than 25%. Most Americans don't think that's fair.

The Buffett Rule would solve the fairness issue through a relatively simple mechanism: If you make over $1 million in income, you pay at least 30% in taxes. That's as simple as Rick Perry's postcard proposal. 

But conservatives also object that the Buffett Rule just wouldn't raise that much money. Relative to the entire budget or economy, that's true. Current estimates suggest the rule would raise about $47 billion in the next 10 years. That would pay for a National Infrastructure Bank or help bring down the budget deficit. 

Conservatives are right to suggest this really isn't about the budget; it's about fairness. That's ok! Part of politics is making sure that political and economic institutions reflect what the general populace thinks is fair. Why should doctors and lawyers have to pay effective tax rates that are 20 points higher than hedge fund managers?

The Buffett Rule certainly isn't a panacea. Everyone agrees the tax system is too complex and in need of overhaul. But, because of political constraints, that ain't happening any time soon, since neither party will suggest specific loopholes it will end, and congress shot down Simpson-Bowles like an enemy plane in a No Fly Zone. 

But the Buffett Rule makes the system a little fairer and raises some revenue with very little risk or downside.