Is Buffett Rule a First Step Towards Tax Reform?

By :: April 18th, 2012

When the president first announced his Buffett Rule–that millionaires should pay at least 30 percent of their income in tax–in the State of the Union address in January, I had a strong sense of déjà vu.  It is another alternative minimum tax, and its provenance is very similar.  Congress created a minimum tax back in 1969 when people were up in arms about 155 high-income people who hadn’t paid tax a few years earlier.  The logical response would have been to close the loopholes that let rich people avoid tax, but that would have been politically costly, so instead we got the thing that evolved into the AMT–one reason  millions of upper middle-class Americans hate tax day.

The new AMT, called the Fair Share Tax, is anathema to tax reform (and I opined on that in Tuesday's New York Times). It will be one more complication for people who are affected.  For example, if you’re on the cusp of paying FST, you won’t know whether your capital gains will be taxes at 15 or 30 percent. And it will generate enormous marriage penalties.

And it’s unnecessary.  If Congress is not willing to fix the underlying defects in the tax code, they don’t need a new AMT. One is really enough.  If capital gains and dividends were fully taxed under the AMT, as they used to be before the Tax Reform Act of 1986, the Buffett Rule would be satisfied without a new levy.  Moreover, I suspect that would raise enough more revenue that Congress could use  the savings to finally index the thresholds for the AMT so that it doesn’t have to be patched every year.

Some people, however, see the Fair Share Tax as a good start on tax reform.  The Times also had a nice article about two economic rock stars, Emanuel Saez and Thomas Picketty, who have been extremely effective at putting together data and analysis on rising economic inequality. The article is titled, “For Two Economists, the Buffett Rule Is Just a Start,” so the question is whether the Buffett Rule is a first step towards tax reform and a fairer, more progressive tax system, or a dead end.

The president has said that the Buffett Rule is not a specific proposal, but a principle for tax reform. The actual specific proposal, the Fair Share Tax, which the president supports, includes language saying that tax reform is the goal (thanks David desJardins for reminding me of this):

It is the sense of the Senate that–

(1) Congress should enact tax reform that repeals unfair and unnecessary tax loopholes and expenditures, simplifies the system for millions of taxpayers and businesses (including by eliminating the alternative minimum tax for middle-class Americans), and makes sure that the wealthiest taxpayers pay a fair share; and

(2) this Act is an interim step that can be done quickly and serve as a floor on taxes for the highest-income taxpayers, cut the deficit by billions of dollars a year, and help encourage more fundamental reform of the tax system.

The question is whether the Fair Share Tax is a complement to tax reform, or a substitute.  The president has been talking about individual income tax reform for several years. The president commissioned Paul Volcker to put together a tax reform plan. The Volcker Commission  issued a report, but the plan went nowhere. The president said that his Bowles-Simpson commission, which would have simplified taxes (although not made them markedly more progressive), had a lot of good ideas, but none of those ideas actually made it into his budget. President Bush actually did commission a credible tax reform plan, but once completed, he acted like it was never his idea.

If the president and Congressional leaders really want tax reform, they should propose tax reform and throw their weight behind it.  I understand this might not be a winning strategy in an election year, but we could lay the groundwork by putting together a serious proposal. President Reagan commissioned his Treasury to quietly put together a tax reform plan behind closed doors during the 1984 election year and then he pushed it to passage in 1986.

I don’t, however, think it’s in Democrats’ long-term interest to further undermine an already dysfunctional tax system. The Fair Share Tax might be good politics, but it’s bad policy.

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For previous coverage of the Buffett Rule on TaxVox, click here.

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3Comments

  1. Vivian Darkbloom  ::  1:11 pm on April 18th, 2012:

    “Congress should enact tax reform that repeals unfair and unnecessary tax loopholes…”

    When a resolution begins with such a silly phrase, it is difficult to imagine that the Senate has *any* sense.

    Just when is a “tax loophole” ever “fair” or “necessary”? I wish that term would be either used properly, or thrown out of the lexicon. It is, however, very useful in identifying those who misuse it intentionally as rhetorically dishonest (or who use it unwittingly as uninformed).

  2. Michael Bindner  ::  1:55 pm on April 18th, 2012:

    Only half the issue is capital gains and dividend taxes, which are taken care of by doing nothing (no one expects that). If Obama hints that he might do nothing, however, ATF donors will get nervous and tell Norquist to support comprehensive tax reform, since letting the Bush/Obama cuts is an inconvenience to most taxpayers but a major increase for the wealthy.

    The other half of the issue is the Social Security Payroll Tax, which is capped. Only uncapping it deals with the Buffett problem fully. The incremental way to do this would be to shift the employer contribution to a VAT or VAT-like employer levy (with exclusiosn for personal retirement accounts) with redistribution happening at the front end by crediting accounts equally, rather than using bend points and basic benefits to determine payment levels. In order to not make Social Security a boon to the wealthy, leave the employee contribution income cap in place – and even lower it so benefit payments are lower. The radical version is to simply end the employee contribution and just go with a VAT-funded equal share benefit (with or without personal accounts).

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