The Buffett Rule Explained
Here's a what it is and why it may matter.
The news has been abuzz with the so-called "Buffett Rule" for the last few weeks. In fact, it's shaping up to be one of the biggest economic issues of the year. Although our firm takes no official position on the subject, it's become a big enough debate that we thought we'd try to present some of the facts. In case you haven't followed the news closely, here's a handy roundup on what it is, and why it matters.
What Is the Buffett Rule?
The Buffett Rule is a proposed law that would establish a minimum effective tax rate for anyone making over $1 million. Such individuals, who comprise approximately 0.3% of all American taxpayers, would have to pay a 30% effective income tax on all of their income. Thus, it is similar to the alternative minimum tax, but is meant to act as a replacement for it. Some estimate that the Buffett Rule will create between $50 billion and $160 billion in additional revenues for the federal government over the course of a decade. Whether this would have a significant impact on the budgetary big picture is a topic of debate. For comparison, allowing the Bush tax cuts to expire could raise about $80 billion per year. Other analysts point out additional means of reducing the deficit, such as cutting entitlement spending.
Why Is It Called the "Buffett Rule?"
The Buffett Rule is named after famed investor Warren Buffett. In 2011, Buffett said that he didn't think it was fair for millionaires to pay a lower effective tax rate than ordinary Americans. Since then, he has championed what has come to be called the "Buffett Rule," which is effectively an increase in the minimum tax rate paid by millionaires.
Why Am I Paying More Than Millionaires?
Capital gains - money made from an investment increasing in value between the time of purchase and the time of sale - is taxed differently than ordinary income, often at a lower rate. Since the wealthy often make a large part of their money from investments, they pay taxes differently than income earned from labor. People who earn the majority of their income from working, on the other hand, may pay a higher rate.
Why Are People for It?
Most advocates of the Buffett Rule are for it in the interest of fairness. Some Buffett Rule advocates say that middle-class Americans paying a greater share of their income than the rich was "indefensible." About half of all Americans think that investments should be taxed in the same manner as income, with over two-thirds of Americans supporting the Buffett Rule as of last month.
Why Are People Against It?
Some call it "class warfare." Yet others believe it will have a detrimental effect on the American economic recovery by effectively raising taxes at a time when the economy is already fragile. Some point out that capital gains are taxed differently than income in order to encourage people to invest. On the left, the Buffett Rule has been criticized as not going far enough and not truly being a form of progressive taxation: It merely taxes the very wealthy at the same rate as middle-class Americans, not a substantially higher rate, as under progressive taxation.
So Why Do I Care?
Even if you make less than $1 million per year, you might still have a stake in the outcome of the bill. It will possibly affect the overall economy, but it's not clear precisely how. For example, there was strong economic (and job growth) during periods when the capital gains rates were higher. And its impact on the deficit, wealth distribution, and so forth, remains to be seen. Regardless of where you stand on the Buffett Rule, it is proving to be a pivotal economic debate worth watching.
Editor's Note: This article by Nicholas Pell was originally published on MintLife.
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