Possible effects of the “Buffett Rule” and higher taxes on the wealthy

 
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In August 2011, the New York Times published “Stop Coddling the Rich,” an opinion piece by billionaire businessman Warren Buffett in which he noted that his tax rate — 17.4% — was significantly lower than the 36% tax rate his non-wealthy colleagues typically paid. Buffett’s call to reconsider the tax rate for Americans earning more than $1 million a year — or “the Buffett Rule” — is reflected in the American Jobs Act of 2011. Among its provisions is a proposal to impose a 5.6% surtax on millionaires to help ensure that these high earners pay a higher percentage of income tax rate than less affluent citizens. But detractors interpret the bill as “class warfare” that will result in anemic job growth and personal savings rates.

A 2011 report by the nonpartisan Congressional Research Service (CRS), “An Analysis of the ‘Buffett Rule’,” analyzes how taxable income is determined, the different tax rates paid by income, and how a surcharge on millionaires would affect job-creation and savings rates.

The report notes that this regressive dynamic in tax rates results from the following: “Higher-income taxpayers with low tax rates receive a very high proportion of the income from long-term capital gains and qualified dividends, which are taxed at low tax rates and not subject to payroll taxes. Lower-income taxpayers with relatively high tax rates receive most of their income from wages, which are subject to payroll taxes.” The tax rate on capital gains and dividends is typically 15%, and “almost 60% of all capital gains and dividends are received by taxpayers with income over $1 million.”

The report’s findings include:

  • U.S. taxpayers with annual incomes less than $100,000 pay on average 35% of their income in taxes, while 65% of millionaires pay on average less than 30% of their income in taxes.
  • However, when examined using Adjusted Gross Income figures, “roughly one-quarter of all millionaires (about 94,500 taxpayers) face a tax rate that is lower than the tax rate faced by 10.4 million moderate-income taxpayers (10% of all moderate- income taxpayers).”
  • Of the U.S. small businesses reporting income, 74% earn below $100,000 annually and 72% (many sole proprietors and business owners) also report income in addition to their own business; this means that “the small share of taxpayers with small business income in the millionaire category suggests that tax reform policies designed to ensure adherence to the Buffett Rule will affect few small businesses.”
  • The report acknowledges that observers fear that increasing taxes on capital gains and dividends will ultimately reduce savings and investments. “Decreasing the rate of return can decrease households’ willingness to save … but at the same time, the decreased return may include households to save more to maintain their desired or target wealth level. Consequently, the effect of capital gains taxes on private saving is likely to be small.”
  • Moreover, “saving rates have fallen over the past 30 years while the capital gains tax rate has fallen from 28% in 1987 to 15% today (0% for taxpayers in the 10% and 15% tax brackets). This suggests that changing capital gains tax rates have had little effect on private saving.”

The report concludes: “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.” In response to the idea of letting the Bush era tax cuts expire, the researchers conclude that such “reforms are unlikely to affect many small businesses or to deter saving and investment.”

Tags: campaign issue

    Writer: | Last updated: October 17, 2011

     

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