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