The truth behind the “Buffett Rule”?

The White House Blog has a new post by Gene Sperling, director of the White House National Economic Council, featuring what purports to be a fact-check in response to the many (sometimes spurious) claims about how the Buffett Rule will negatively impact our nation’s financial future (i.e. that it will tax the “job-creators,” discourage investment, overburden the overtaxed wealthy, cause “class warfare,” etc.).

While I doubt that such a rule will cause markets to crash and the world to end as some in the public spectre as well as numerous contributors to the WSJ op-eds might have you believe, it may  just add further complexity to an already ridiculously confusing Tax Code (note: my full set of the Internal Revenue Code and accompanying Treasury Regulations spans 8 volumes, each the width of a phone book with pages as thin as rice paper…).  In a sense, the rule seems to be a second attempt at making the AMT (alternative minimum tax) actually apply to those it was originally intended for.

Sperling admits that this rule alone will not solve the nation’s revenue crisis, and takes great pains at emphasizing just how few people this will actually affect.  In a sense, the defense falls a bit short by relying too much on the Republican model of using the same sound bites over and over (i.e. that it will “only impact 3 out of every 1,000 Americans,” if that).  Furthermore, Sperling emphasized that the Buffett Rule would just be one piece in a larger tax reform puzzle, including rate reductions, expenditure elimination, and, of course, deficit reduction.

The Economist featured an interesting counter-point article that warned of “soak the rich” strategies and presented the following data:

The rich pay a substantial share of taxes across the developed world, and this share has risen in recent decades. According to the OECD, a think-tank, the top 10% of earners contribute about a third of total tax revenues—28% in France, 31% in Germany and 42% in Italy. Rich Britons pay about 39% of total taxes while America’s wealthiest households contribute a larger share to government than in any other OECD country, at 45%. Looking just at income tax, the share paid by the top 1% of earners in America rose from 28% in 1988 to 40% in 2006, in Britain it rose from 21% in 1999 to 28% this year. America’s greater dependence on its rich is due in part to their good fortune. As of 2007, the total earnings of the top 1% equalled 74% of all taxes paid, up from 24% in 1976. The rich are a juicy target because their taxes could conceivably cover far more of the budget than before.

However, the article also had some other historic considerations to keep in perspective:

In the late 1970s top marginal income-tax rates of 60-90% were not uncommon across advanced economies. But with the dawn of stagnation, academic economists favoured reduced government intervention, and lower, flatter tax systems gained ground. Tax burdens on the rich have fallen…the trend was particularly pronounced in America and Britain. Ronald Reagan campaigned by touting tax cuts as a means to rescue the American economy from stagnation. During his administration, top marginal tax rates dropped in steps from 70% to 28%.

And a further point is just how well America’s wealthy have done for themselves:

America’s rich have done better still. The top 1% of earners in America (roughly, those earning more than $400,000 a year) captured 58% of real economic growth from 1976 to 2007, and now take home roughly 18% of all pre-tax income earned, up from less than 10% in the 1970s. The share of the top 0.1% alone quadrupled over that period.

The article goes on to discuss the historic impact of increasing taxes on the wealthy.  Apart from distorting investment decisions, the Economist posits that even a minor increase in the tax rate can result in an offsetting decline in real GDP in the short run.  Perhaps a replay of the 1986 reforms (reducing the rate, broadening the base) may be the better (if not politically streamlined) approach.  As we head into an election year (and as the economy stagnates), one should fully expect the debate to continue to dominate the public discourse.  I only hope that a workable and equitable solution emerges from all of the rhetoric.  Naive of me?  Perhaps.