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Obama and the ‘Buffett Rule’

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In their zeal to pass the "Buffett Rule," President Obama and Vice President Biden leave the false impression that many, if not most, millionaires (people who earn $1 million or more a year) are paying a lower tax rate than the middle class.

The fact is that even without the Buffett Rule "more than 99 percent of millionaires will pay" a higher tax rate than those in the very middle of the income range in fiscal year 2015, according to the nonpartisan Tax Policy Center.

The president and vice president have given a series of speeches in recent days to gather public support for the Buffett Rule. The proposal is named after billionaire investor Warren Buffett, who famously wrote that many of his office staff pay a higher tax rate than he does. It would require high-income taxpayers to pay an effective tax rate of at least 30 percent of their adjusted gross income. (The effective tax rate includes not just income taxes, but also the employee share of payroll taxes and other federal taxes.) The proposal is expected to come up for a Senate vote during the week of — yes, you guessed it — April 15.

But Obama and Biden have distorted the facts when explaining the proposal and its impact. In an April 10 speech, the president described the Buffett Rule this way: "[W]hat the rule says is you should pay the same percentage of your income in taxes as middle-class families do." But that's largely the case now. Two days later, Biden declared that Buffett is "not alone," and there are "tens of thousands and several millions of people who are in that same situation." It may be "tens of thousands," but certainly not "several millions." Warren Buffett is the exception, not the rule.

Obama, April 10: In the next few weeks, we're going to vote on something called the Buffett Rule — very simple: If you make more than $1 million a year — now, I'm not saying you have a million dollars — right? I'm not saying you saved up all your money and you made smart investments and now you've got your nest egg and you're preparing for retirement. I'm saying, you're bringing in a million bucks or more a year. Then, what the rule says is you should pay the same percentage of your income in taxes as middle-class families do.

Biden, April 12: But the thing is [Buffett's] not alone. There are tens of thousands and several millions of people who are in that same situation that — making over a million dollars do the same exact thing.

The Tax Policy Center did an analysis of the Paying a Fair Share Act of 2012. Roberton Williams, a senior fellow at the center who spent 22 years at the nonpartisan Congressional Budget Office, wrote that even without the Buffett Rule, only about 4,000 of those with $1-million-and-above incomes will pay less than the 15 percent effective federal tax rate that middle-income households will pay in fiscal year 2015.

Williams, Feb. 9: The Buffett rule sounds good in principle. High-income taxpayers should pay at least as large a share of their income in taxes as the rest of us. But most already do. On average, middle-income households will pay 2015 taxes totaling about 15 percent of their income (using the legislation's definition). Without the Buffett rule, more than 99 percent of millionaires will pay more than that and only about 4,000 will pay less.

The legislation would raise taxes for a lot more individuals than those 4,000 "millionaires," however. That's because it would impose a minimum effective rate of 30 percent for those in the million-and-over income range — which is actually double the average rate for truly "middle-income" persons. Those are the individuals with incomes that fall in the middle 20 percent — earning between $39,862 and $69,074 in 2011, according to the Tax Policy Center's analysis.

Under current law (which assumes the Bush tax cuts expire as scheduled at the end of this year), the Tax Policy Center estimates the Buffett Rule would raise taxes for 116,000 households (or about a quarter of the 438,000 households with adjusted gross income of $1 million or more minus charitable deductions).

Small Impact on Deficit

Furthermore, imposing the Buffett Rule wouldn't raise as much money as you might think listening to the president and vice president. It would generate $20 billion a year in additional tax revenue — which is about 3 percent of the $609 billion deficit the White House projects for fiscal year 2015 (and only 1.5 percent of last year's $1.3 trillion deficit).

Williams said the bottom line is that there is a "big difference" in income tax rates paid by the wealthy and the very wealthy. That's because the very wealthy, like Buffett, accumulate wealth not through income but through investment profits, dividends and interest, which are taxed at the current capital gains tax rate of 15 percent, rather than the current top income tax rate of 35 percent. (The capital gains would return to 20 percent and the top income rate to 39.6 percent, if the Bush tax cuts expire, as explained by the Congressional Budget Office's analysis of the president's budget.)

"Some pay a lot of [income] taxes and some don't pay a lot of taxes," Williams said. "That was made very obvious by the fact that Mitt Romney paid just 13.9 percent [in 2010]."

The Obama campaign has a "Pass the Buffett Rule" calculator on its website that allows visitors to compare their tax rates with Romney's. But that's misleading, too.

Romney, like Buffett, isn't your average rich guy. He reported earning $21.7 million in 2010 — mostly in dividends and investment income. His 13.9 percent tax rate was far lower than the 24.1 percent average for those earning more than $1 million. But visitors to the campaign site wouldn't know that, and they wouldn't know it listening to Obama and Biden, either.

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Pete Souza/White House

President Barack Obama meets with Warren Buffett, the Chairman of Berkshire Hathaway, in the Oval Office on July 18.

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