Beyond the Buffett Rule bloviation

The latest Bloomberg Businessweek offers this assessment of President Obama’s Buffett Rule:

President Obama’s sales pitch for the so-called Buffett Rule is simple: It’s only fair that those who make more than $1 million a year should pay a higher tax rate than middle-class workers. Here’s what he tends not to mention: For the most part, they already do. …

… According to government tax data, the median effective tax rate for the middle 20 percent of U.S. taxpayers is 13.3 percent, including income, payroll, and corporate taxes. The top 1 percent of taxpayers pay a median rate of 29.6 percent, according to the 2012 Economic Report of the President. Just one-tenth of these highest-income households have tax rates of 8.7 percent or less.

If the Buffett Rule—officially named the Paying a Fair Share Act of 2012—became law, the number of people required to pay substantially more in taxes would be relatively small. Of the 217,000 households that would be affected by the rule, 4,000 will have incomes exceeding $1 million and tax rates below 15 percent, according to estimates for 2015 by the Tax Policy Center, a nonpartisan research group. The average rate, including payroll tax, for the middle 20 percent of taxpayers will be 15.9 percent, the center projects.

Although investors including Buffett and Romney—who are now taxed no more than 15 percent on capital gains and dividends—would be “clobbered” by the Buffett Rule, says Tax Policy Center senior fellow Roberton Williams, the tax rate of top executives, movie stars, and pro athletes wouldn’t change as much because their pay is already taxed as ordinary income. High-income households with a mix of ordinary and capital income currently have rates from 15 percent to 30 percent. Their taxes would rise, though they already pay more than middle-class households.

Of course, the article does not mention that the invested money that generates capital gains each year already has been taxed as income in a previous year. Thus the 15 percent capital gains tax rate doesn’t tell the whole story of the amount of taxation a high earner faces.

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