President Obama's proposal to set a minimum 30% tax rate for millionaires and billionaires, known as the Buffet Rule, is often debated in terms of fairness. But fairness is often in the eye of the beholder. Looking at the proposal through an economic and budget lens offers a more substantial debate, albeit a more complex one.
In tackling this aspect of the Buffet Rule, first let us differentiate between the two separate issues applicable here, the economy on one hand, and federal budget debt/deficits on the other. The effect the Buffet Rule would have on each of these should be addressed separately.
1. The Economy: First, some background info is in order. The U.S. economy is suffering from high unemployment incurred during the Great Recession. We still have a long way to full recovery.
The reason unemployment is high, and the main factor in determining how many jobs are created and thus how fast the economy recovers, is aggregate demand. This is simply the sum of all goods and services being purchased in the economy. This includes major categories such as consumer spending, business spending, and government spending. Any of these purchases contribute directly to the need for workers to be hired to provide these goods and services. In turn, these newly hired employees obtain an income that they spend, further increasing aggregate demand.
The issue here as it pertains to the Buffet Rule is the well known phenomenon that wealthy people spend a much smaller percentage of their incomes than low or middle-income earners. A stable economy requires that the middle class have sustained income growth to buy what a growing economy is capable of producing. But the shifting of income away from the middle-class and towards the wealthiest has hurt their ability to sustain the economy. Income inequality has reached its highest level since the Gilded Age of the 1920's and the Great Depression that followed. It is no coincidence that such high levels of income equality are followed by economic collapse.
The Buffet Rule would help reduce the shifting of income away from the middle-class, and help the economy long-term through a stronger, more resilient middle-class. It's still a relatively small move that does not come close to the 70% and higher top income tax rates we had for the many prosperous decades following the Great Depression. But, it reprents an improvement over current law.
2. The Budget: The deficit is a secondary, long-term issue. It is essentially a financial accounting issue, the moving around of that paper we call money. People will often ridicule proposals that seem to make an insignificant dent in the deficit. But it's important to understand that the explosion in deficits in recent years are mainly due a massive drop in tax revenues and increases in emergency spending. Both of these are temporary events resulting from the recession and both issues will dissipate as the economy recovers. That is another reason to focus efforts on improving the economy as the first priority.
The Buffett Rule would bring in an additional $47 billion in revenue over 10 years, a sum which will be significant in balancing the budget and fueling our economic recovery.
The $47 billion figure is actually an understatement. This is because it makes the assumption that the Bush tax cuts will be allowed to expire, which itself would raise tax rates closer to what the Buffett Rule would require. This would mean most of the effect of the Buffett Rule would be attributed to the expiration of the Bush tax cuts. However, if the Bush tax cuts are extended further, which is a very real possibility, the Buffett Rule would generate about $160 billion.
It does not matter whether this $160 billion is raised through a combination of the expiration of the Bush tax cuts and the Buffett Rule, or the Buffett rule alone.
The Buffett Rule is a solid step towards the long-term re-balancing of the nation's economy as well as the budget.