Why I Don't Care About the Buffett Rule

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The administration's new "I dare you to vote against this ostensibly fair tax increase" strategy won't work, and you should ignore it. (But here are a few hundred words on it, anyway.)
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Reuters

I must begin this article with an apology. I'm an economics writer, a lover of tax policy, and a politics nerd. So this should be a second Easter for me: Right now, the most important economic debate is over the administration's "Buffett Rule", which would ensure that virtually all millionaires paid a minimum of 30 percent of their income in taxes. And I'm apologizing here because, frankly, I just don't care about the Buffett Rule.

Let's start with some context for my indifference. The maxim that "Warren Buffett pays a lower tax rate than his secretary" has become the kind of cliche that gives birth to many false claims, but it reflects a broader truth. The very rich occasionally pay a smaller share of their income in taxes because of the way we tax income. Earned income, like from wages, is taxed with one ladder of rates going up to 35%. Investment income, like from stocks, is taxed at a lower rate. As a result, rich investors like Buffett can wind up with a smaller "effective tax rate" than their secretaries if they get most of their money from investments rather than wages. And bear in mind that 97% of capital gains go to millionaires. Warren Buffett is an extraordinary man, but his tax "break" isn't extraordinary, at all, among millionaires.

Is Buffett's circumstance a crisis that deserves a Rule? Conservatives don't think so. They tend to think that lower tax rates for investments encourage savings and investments, which grows the economy. Maybe they're right. The White House, for its part, has decreed that no millionaire should pay a lower rate than the typical middle class family. Sen. Sheldon Whitehouse has drafted legislation that would make the rule a law by establishing an absolute minimum tax rate of 30 percent for virtually all millionaires.

For the administration, the Buffett Rule offers the perfect blend of policy and strategy. Democratic presidential hopefuls have been campaigning for higher taxes on the rich since the 2004 campaign. The Buffett Rule puts the case for higher taxes in a frame perfectly chiseled for the politics of the moment. That frame is "fairness."

Is it "fair" that, in a moment when middle class families are fighting high unemployment and stagnating wages, a billionaire might pay the same tax rate as your typical upper-middle class family? The administration is banking on a couple million people answering no. (It brightens the contrast that Mitt Romney's tax plan would cut taxes on the 1% by an average $150,000.)

$5 BILLION

My indifference toward the Buffett Rule begins with the tiny difference it would make. On top of the president's current tax proposal, it would raise less than $50 billion over the next decade. That's $5 billion a year. (If you're measuring against current tax policy, it's more like $16 billion a year.) A fight over $5 billion a year is a pretty small fight.

The much bigger fight is over what $5 billion a year means: Raising taxes. But witness the impossible shrinking expectations of the higher-taxes crowd. In December 2010, the president's deficit commission proposed raising taxes on the top 50%. The president himself proposed to raise taxes on the top 2%. The Buffett Rule would raise taxes on less than 1% of households. At this rate, by June, the Buffett Rule will apply exclusively to the 0.00000001% of the population named Warren Buffett.

Don't bet against Democrats forcing that vote. For two decades, the Republican Party has marched under the banner, "A tax increase anywhere is a threat to economic growth everywhere." For two decades, it's basically worked. Today, Democrats, sensing weakness, are basically daring Republicans to vote against increasingly small tax increases on increasingly elite swaths of the country. It might be a nice political strategy, or it might backfire entirely. Here's what I predict. We'll have a vote. The GOP will vote no, in unison. In a month, nobody will care, and the election will swing, not on tax fights, but on growth.

Maybe after November, we'll have a tax debate for the other 99%.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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