The Buffett Rule is Back: What Obama’s Fair Share Tax Would Mean

Investing

What is the Fair Share Tax being proposed in the White House 2014 budget proposal, and how would it apply?

In September of 2011, prominent business blogger Megan McArdle asked, If a “Buffett Rule” is such a great idea, how come the administration doesn’t actually propose enacting one?

Well, now they have. In President Obama’s budget proposal for fiscal year 2014, the Administration calls for a “Fair Share Tax.” This tax is a variation on the Buffett Rule, which argues that millionaires should not pay a lower income tax rate than their secretaries.

The Key Numbers You Need to Know:

  • According to the Administration, their Fair Share Tax proposal would raise about $53 billion over the next ten years.
  • In a nutshell, the President’s team is calling for a new tax on all adjusted gross income, with the tax phasing in between $1 and $2 million per year in AGI.
  • The President is also calling to index the threshold for inflation.

The Administration has been friendly towards the concept of the Buffett Rule for a couple of years, at least. The White House has web page devoted to the idea, complete with a lengthy lecture by White House advisor Brian Deese, the Deputy Director of the National Economic Council, the same wonk who at age 31 was entrusted by the Administration with the job of tearing apart General Motors.

The President also pushed the idea at the beginning of last year, when the White House published “An America Built to Last.” The Administration wrote:

“Last year, the President called for tax reform that follows the Buffett Rule – the principle that no household making over $1 million a year should pay a smaller share of its income in taxes than middle-class families pay. In support of this rule, the President is now specifically calling 
for measures to ensure everyone making over a million dollars a year pays a minimum effective tax rate of at least 30%. The Administration will work to ensure that this rule is implemented
in a way that is equitable, including not disadvantaging individuals who make large charitable contributions.”

The Administration doubled down on the concept on April 10th, releasing an update and expanding their call for the codification of the Buffett Rule into law. The President also made it a centerpiece of his radio address on April 14th.

The Real Impact on Millionaires

Calling for a tax code that requires “millionaires” to pay at least 30 percent of their income in taxes is quite a different thing than enacting it, though. While the President’s National Economic Council spills quite a bit of ink demonstrating that some millionaires pay a much lower tax rate than middle class families do, the Administration does not advance specific, proposed language for a bill. Instead, it calls on Congress to do so. Since all revenue bills must originate in the House, which is controlled by Republicans, it’s unlikely we’ll see much movement.

Issues To Consider

The Administration says that over 1,400 millionaires – that is, individuals with over $1 million in income for the year – paid zero income tax in 2009. But that’s largely due to the tax subsidy on municipal bonds. The federal government does not charge income tax on income from municipal bond interest. This subsidy makes it much cheaper for municipalities to borrow – and with many cities and counties teetering on the brink of bankruptcy, this subsidy is critically important. One wrong move could spark a tsunami of defaults on municipal bonds, or mass layoffs of public employees as city and state officials struggle to avoid bankruptcy while paying more to investors to cover federal income tax on their bonds.

Another problem is that increasing taxes on dividend income and capital gains (yes, some observers consider capital gains to be ‘income’ for this purpose) would have the effect of discouraging investment. These effects may be muted, somewhat, by the fact that these millionaires wouldn’t have much choice to avoid the tax.

Hurting Charitable Deductions

Regarding charitable deductions, the President is calling for a credit of up to 28 percent of the taxpayer’s charitable deductions.  “Currently, a millionaire who contributes to charity or deducts a dollar of mortgage interest enjoys a deduction that is more than twice as generous as that for a middle class family,” writes the Office of Management and Budget in their discussion of the Fair Share Tax on Page 36 of this document – a curious construction, because it is not the millionaire who “enjoys” this deduction. The millionaire would be better off not making a charitable deduction at all, but simply paying the income tax and keeping the rest of the money. Nevertheless, the President is calling for scrapping the treatment of charitable contributions as an above-the-line deduction, and instead offering a 28 percent tax credit on the amount donated.

That works for anyone at the 28 percent marginal tax bracket or below. But anyone above that would, indeed, be disadvantaged by the tax. Indeed, because the credit is two percent lower than the targeted minimum effective tax rate, the plan, by design, would tax charitable givers on money they gave away. According to the OMB, the measure would negatively affect only three percent of tax filers.