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Some commentators have suggested that, because people with incomes exceeding $1 million, on average, pay higher effective tax rates than middle-income people, the problem targeted by President Obama’s “Buffett Rule” does not exist. As demonstrated in a new report from CTJ, the problem is not the effective tax rates of millionaires across the board but a particular class of millionaires whose income is mostly from investments. Investment income is taxed less than other types of income, allowing millionaire investors to pay a smaller percentage of their income in federal taxes than do many working-class people.

The report demonstrates that this problem is not isolated to rare cases. In fact, almost one third of taxpayers with income exceeding $10 million fall into this category (of taxpayers who rely on investment income for over half of their total income). Over 90 percent of taxpayers making between $60,000 and $65,000 (which includes Mr. Buffett’s famous secretary) rely on investment income for less than a tenth of their income — and pay a higher federal tax rate as a result.

The report also explains what Congress can do to implement the Buffett Rule and solve this problem. The first step, perhaps surprisingly, is to prevent repeal of health care reform, which includes a change in the Medicare tax that will take a limited first step in addressing this unfairness. Additional reforms are needed, which may include eliminating tax preferences for investment income or a surcharge on income exceeding $1 million as recently proposed by Senate Democrats.

Photo of Warren Buffett and Barack Obama via The White House Creative Commons Attribution License 2.0