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Citizens for Tax Justice has calculated that President 
Obama’s “Buffett Rule” would, if in effect this year, raise $50 billion in a single year and affect only the richest 0.08 percent of taxpayers — that’s just eight percent of the richest one percent of taxpayers.
During his State of the Union address, President Obama proposed that Congress enact his Buffett Rule, inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.
CTJ has long argued that the most straightforward way to fix this problem is to end the special low tax rate for capital gains and stock dividends.
A document released from the White House on Wednesday suggests the President would take a different approach. It explains that
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 last sentence apparently means that charitable deductions for millionaires would not be affected.
To calculate the $50 billion figure, we assumed that there would be a minimum tax that applies to adjusted gross income (AGI) minus charitable deductions. (We’ll call this modified AGI.)
We assumed that a taxpayer with modified AGI greater than $1 million would face a minimum tax of 30 percent of modified AGI. The taxpayer would pay whichever is greater, their personal income tax under the existing rules or this minimum tax.
Revenue Impact Would Depend on Details
Of course, taxes always have to be a little more complicated than that. We had to assume that this minimum tax is phased in over a certain income range rather than allow it to kick in fully for everyone with exactly $1 million or more in modified AGI. Otherwise, a person with modified AGI of $999,999 might have an effective rate of 15 percent, and if they make $2 more their effective tax rate will shoot up to 30 percent. Congress generally avoids enacting any tax rules that have this sort of “cliff” effect.
So we assumed that the minimum tax would be phased in for taxpayers with income between $1 million and $2 million. That means that only half of the minimum tax applies if you make $1.5 million, and the entire minimum tax applies if you make $2 million or more. This means that the Buffett Rule could raise less revenue or more revenue if Congress chose different rules to phase it in.
CTJ Report Explains Need for Buffett Rule
A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.
As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).
The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.
For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent. This is the problem that the Buffett Rule would solve.
Photo of Warren Buffett via Track Record Creative Commons Attribution License 2.0