Skip to main content

The Buffett Rule is going nowhere

By Edward J. McCaffery, Special to CNN
updated 2:47 PM EDT, Mon April 16, 2012
 Warren Buffett, head of Berkshire Hathaway, wouldn't really be affected by the
Warren Buffett, head of Berkshire Hathaway, wouldn't really be affected by the "Buffett Rule," says Edward J. McCaffery.
STORY HIGHLIGHTS
  • The Buffett Rule is designed to make sure those who make over $1 million pay more tax
  • Edward McCaffery: The idea has three fatal flaws
  • He says that even if it's enacted, it wouldn't really affect namesake Warren Buffett
  • McCaffery: Real reform can be achieved with a progressive consumption tax

Editor's note: Edward J. McCaffery is Robert C. Packard Trustee Chair in law and professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler."

(CNN) -- April, the cruelest month: Time for tax deadlines and tax policy follies. Hence, the resurrection of the so-called Buffett Rule.

Named after Warren Buffett, who said it was an outrage that he pays a lower tax rate than his secretary, the proposal is designed to ensure that the really rich -- those with annual reported taxable incomes of more than $1 million -- pay an "effective tax rate" of 30%.

The idea is another attempt by President Barack Obama to restore some measure of progressivity to the tax code. Baffled and blocked by the mythical Joe the Plumber, Obama has been unable to restore the top marginal tax rate on those reporting more than $250,000 a year to their pre-George Bush levels, a top rate of 39.6% from its current 35%. That seemingly modest proposal was a centerpiece of Obama's landslide 2008 election campaign. It has gone nowhere. Neither will the Buffett Rule. Why? Because the idea has three fatal flaws.

Edward J. McCaffery
Edward J. McCaffery

1. The Buffett Rule is moot.

It's dead on arrival. The rule has no chance of getting through the House, even it can get through the Senate. And if history is any guide, any form of tax increase, on anyone, will not bring votes to any person or party in November, so there are no political points to score here. Ask Joe the Plumber. The practical political fact sits alongside some pressing fiscal facts: America is running massive deficits. Our spending is too high. Our revenues are too low. We are a Greece waiting to happen. Meanwhile, inequality of all forms is getting worse. We need to do something, not nothing. Empty April symbolism is nothing.

Explain it to me: The 'Buffett Rule'

2. The Buffett Rule won't help solve the real problems.

It won't help the fiscal problem because it is a drop in the bucket. The most optimistic projections are that the rule might raise $50 billion a year. That's unlikely, because people plan around tax increases, but even if we get it, it is about 3% of the projected $1.5 trillion deficit. The rule could only be meaningful if it were some kind of first step. But first step toward what?

History shows that marginal tax rates were raised on the very highest bracket to 94% in the midst of World War II. History also shows that almost no one paid tax in this bracket. Why do it then? Because a top rate of 94% made lower rates of 50% and 70% look more palatable. Is the Buffett Rule a first step toward lowering the 30% flat rate to those making more than $250,000, or raising other middle-class taxes? It is hard to see anything very good happening here.

3. The Buffett Rule, even if enacted, won't work because it won't really affect Warren Buffett!

The really, really rich in America don't pay high taxes because they don't report high incomes. And they don't report high incomes for perfectly legal reasons. As I have been writing for decades now, the really, really rich, including Robert Kiyosaki's "Rich Dad," follow the three simple steps of Tax Planning 101: Buy, borrow and die.

By buying assets that rise in value without producing cash, the really, really rich benefit from "unrealized appreciation" that need not go down on any tax form. This is key to the business and investment strategy of Buffett's Berkshire Hathaway. When the really, really rich want to consume, they borrow, also tax-free under the income tax. To cash it all out, the really, really rich die, like we all do -- and then the so-called stepped-up basis on death means that their heirs can sell off assets and pay off debts, tax-free.

We can and should attack Tax Planning 101 and make the really, really rich pay some tax. We should address the tax benefits of unrealized appreciation and, even more so, of borrowing.

We can do so, surprisingly simply, by a progressive consumption tax, as I and others, like Robert Frank and Greg Mankiw, have advocated for years. That's real reform that would really affect Warren Buffett. As such, I suppose it must wait until April passes.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Edward J. McCaffery.

ADVERTISEMENT
Part of complete coverage on
updated 6:31 PM EDT, Mon July 28, 2014
LZ Granderson says the cyber-standing ovation given to Robyn Lawley, an Australian plus-size model who posted unretouched photos, shows how crazy Americans' notions of beauty have become
updated 7:56 AM EDT, Mon July 28, 2014
A crisis like the Gaza conflict or the surge of immigrants can be an opportunity for a lame duck president, writes Julian Zelizer
updated 2:22 PM EDT, Sat July 26, 2014
Carol Costello says the league's light punishment sent the message that it didn't consider domestic violence a serious offense
updated 8:51 AM EDT, Mon July 28, 2014
Danny Cevallos says saggy pants aren't the kind of fashion statement protected by the First Amendment.
updated 2:52 PM EDT, Mon July 28, 2014
Margaret Hoover says some GOP legislators support a state's right to allow same-sex marriage and the right of churches, synagogues and mosques not to perform the sacrament
updated 2:31 PM EDT, Mon July 28, 2014
Megan McCracken and Jennifer Moreno say it's unacceptable for states to experiment with new execution procedures without full disclosure
updated 2:50 PM EDT, Mon July 28, 2014
Priya Satia says today's drones for bombardment and surveillance have their roots in the deadly history of Western aerial control of the Middle East that began in World War One
updated 12:35 PM EDT, Mon July 28, 2014
Jeff Yang says it's great to see the comics make an effort at diversifying the halls of justice
updated 11:55 AM EDT, Sat July 26, 2014
Rick Francona says the reported artillery firing from Russian territory is a sign Vladimir Putin has escalated the Ukraine battle
updated 2:22 PM EDT, Sun July 27, 2014
Paul Callan says the fact that appeals delay the death penalty doesn't make it an unconstitutional punishment, as one judge ruled
updated 6:25 PM EDT, Thu July 24, 2014
Pilot Robert Mark says it's been tough for the airline industry after the plane crashes in Ukraine and Taiwan.
updated 11:10 AM EDT, Fri July 25, 2014
Jennifer DeVoe laments efforts to end subsidies that allow working Americans to finally afford health insurance.
updated 11:33 AM EDT, Sat July 26, 2014
Ruti Teitel says assigning a costly and humiliating "collective guilt" to Germany after WWI would end up teaching the global community hard lessons about who to blame for war crimes
updated 8:45 AM EDT, Fri July 25, 2014
John Sutter responds to criticism of his column on the ethics of eating dog.
updated 9:02 AM EDT, Fri July 25, 2014
Frida Ghitis says it's tempting to ignore North Korea's antics as bluster but the cruel regime is dangerous.
updated 2:50 PM EDT, Fri July 25, 2014
To the question "Is Putin evil?" Alexander Motyl says he is evil enough for condemnation by people of good will.
updated 2:03 PM EDT, Thu July 24, 2014
Laurie Garrett: Poor governance, ignorance, hysteria worsen the Ebola epidemic in Sierra Leone, Guinea, Liberia.
updated 9:49 AM EDT, Thu July 24, 2014
Patrick Cronin and Kelley Sayler say the world is seeing nonstate groups such as Ukraine's rebels wielding more power to do harm than ever before
updated 6:05 PM EDT, Wed July 23, 2014
Ukraine ambassador Olexander Motsyk places blame for the MH17 tragedy squarely at the door of Russia
updated 7:42 AM EDT, Thu July 24, 2014
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
updated 2:53 PM EDT, Thu July 24, 2014
Les Abend says, with rockets flying over Tel Aviv and missiles shooting down MH17 over Ukraine, a commercial pilot's pre-flight checklist just got much more complicated
updated 9:17 AM EDT, Thu July 24, 2014
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
updated 12:37 PM EDT, Thu July 24, 2014
Gerard Jacobs says grieving families and nations need the comfort of traditional rituals to honor the remains of loved ones, particularly in a mass disaster
updated 10:13 AM EDT, Thu July 24, 2014
The idea is difficult to stomach, but John Sutter writes that eating dog is morally equivalent to eating pig, another intelligent animal. If Americans oppose it, they should question their own eating habits as well.
updated 12:30 PM EDT, Wed July 23, 2014
Bill van Esveld says under the laws of war, civilians who do not join in the fight are always to be protected. An International Criminal Court could rule on whether Israeli airstrikes and Hamas rocketing are war crimes.
updated 10:08 AM EDT, Wed July 23, 2014
Gordon Brown says the kidnapped Nigerian girls have been in captivity for 100 days, but the world has not forgotten them.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT