The New York Times ran a piece about some of the hurdles facing the adoption of President Obama’s new tax rule dubbed the Buffett Rule. The idea for the Buffett Rule comes from the fact that investors who make their money primarily through capital gains pay much lower tax rates than a great number of far poorer Americans. As Buffett famously remarked, despite being a multi-billionaire who makes extraordinary sums of money each year, he pays a lower tax rate than his secretary.
Although the Buffett Rule does a good job of bringing attention to the ways in which the super-rich avoid paying a fair share of taxes, it is ultimately a misguided and unnecessarily complicated solution to that problem. The reason why people like Warren Buffet and Mitt Romney pay such low tax rates — Romney paid a 13.9% effective tax rate in 2010 — is that capital gains and dividends are taxed at a much lower rate than normal income. The solution then seems quite obvious: subject capital gains to the same taxes that wages and salaries are subjected to.
Instead, Obama has forwarded this complicated Buffett Rule which effectively institutes an Alternative Minimum Tax only for millionaires that ensures they pay at least a 30% effective tax rate. Why millionaires and not those making $999,999? Well, no good reason except of course that millionaires make a more compelling rhetorical target. While I support the Buffett Rule in principle and welcome the discussion it generates around the unfairness of capital gains taxes, ultimately it would be far better to simply tax all earnings the same. That would still make sure millionaires paid higher taxes, but without also instituting a needlessly complicated and somewhat arbitrary tax rule.