The Bullpen

Effectiveness of Buffett Rule Depends on How It Manifests Itself

The zeal for fact-checking in the traditional media has gotten so intense that they have now taken to fact-checking principles. Glenn Kessler gives the “Buffett rule” this treatment, even while acknowledging that the deficit reduction plan “never really explains what that means, and administration officials have refused to lay out any detailed proposal.”

We don’t have enough data to make a Pinocchio ruling, but we were struck by the fact that at a White House briefing, administration officials resolutely refused to explain how the Buffett Rule would be put into effect. “Now, there are lots of different ways to achieve that principle,” Treasury Secretary Timothy Geithner said. “How you do it depends on what you do to the broader tax system as a whole. … We’re going to fight to make sure that’s part of what Congress considers and ultimately delivers.”

The first iteration of this suggested that the Buffett rule would replace the alternative minimum tax, which is designed to achieve the same goal, to force some minimum level of taxation for wealthy individuals after itemized deductions. But the AMT dips way down into the top echelons of the middle class, and so it would be hard to devise a revenue-neutral proposal to replace that with the Buffett rule. It might be a more elegant way to ensure a minimum tax, but it would probably capture less money for the government.

There are other ways to get at this. Many countries across the world have simply imposed higher taxes on the wealthy, so instead of a principle of so-called fairness, it’s just that millionaire’s have to pay more. Moreover, Bruce Ackerman and Anne Alstott think the principle can be secured through a wealth surtax:

While the top 1% of Americans earned 21% of the nation’s income, they owned a staggering 35% of the wealth in 2006-07, the most recent year for which statistics are available. We should be taxing that wealth directly, and not merely focusing on million-dollar incomes.

We propose a 2% annual wealth tax on households owning more than $7.2 million in net assets. Such a tax would target the 0.5% of Americans at the top of the pyramid, and would yield at least $70 billion a year. This calculation is based on Federal Reserve data that we have updated to take into account the recession’s impact on housing and stock prices to 2009. Because we have used very conservative assumptions, the revenue yield could well be higher.

Obama’s operational proposal for a “Buffett tax” is vague, so it’s hard to predict how much it would raise. But our initiative would generate at least half the $1.5 trillion in deficit reduction that Congress’ super-committee is aiming to achieve over the next decade. And the burden would fall on the Americans who have suffered least from the economic downturn.

Ackerman and Alstott make the point that this is more than a tax fairness issue, but an issue of sustainable democracy. Power and influence concentrated in the hands of so few creates an oligarchy in all but name.

Taxing wealth, or taxing income earned through capital gains, is a way to reduce this fundamental inequity and get at rampant inequality.

Predictably, Republicans are not amused. Reihan Salam’s take is actually a muted version of this, promoting a regressive consumption tax. It’s just a variation of the new conservative battle cry that everyone has to pay – hardship for the poor, a few nickels from the rich. The more ordinary objection is to simply shout “class warfare” and be done with it.

I think Senate candidate Elizabeth Warren hit on the most effective rebuttal to that, a stirring defense of the commons.

I hear all this, you know, “Well, this is class warfare, this is whatever.”—No!

There is nobody in this country who got rich on his own. Nobody.

You built a factory out there—good for you! But I want to be clear.

You moved your goods to market on the roads the rest of us paid for.

You hired workers the rest of us paid to educate.

You were safe in your factory because of police forces and fire forces that the rest of us paid for.

You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea—God bless. Keep a big hunk of it.

But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

But until we actually know how this principle will be put into practice, it’s hard to assess the Buffett rule. Hopefully Senator Warren will be one of the people making the decision.

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David Dayen

David Dayen