Buffett Rule Would Not Help Job Growth or Impact the Federal Debt

The Buffett Rule proposal by President Obama is yet another attempt by the administration to stoke the flames of class warfare for political purposes.

The proposal is dramatic in name only as it is predicted to generate only $47 billion of new revenue over 10 years, or less than $5 billion annually. This compares to annual national deficits of over a trillion dollars during the past four years (three of these years were during Obama’s tenure). It may be useful to step back and consider what the effect of this proposed legislation will have on our nation’s financial condition and the wealthiest tax payers in the country.

On August 14, 2011, Warren Buffett, the billionaire investor, wrote an op-ed piece for the New York Times. In it, he proposed that the federal government increase rates on those with taxable income over $1 million (236,883 tax payers) and even more for those who earn greater than $10 million (8,274 tax payers). Specifically, he suggested increasing the capital gains rate, which inordinately benefits the super wealthy.

In the previous year, Buffett told us in his essay, he paid taxes of nearly $7 million, or 17.4% of his taxable income, a rate lower than all of the 20 people in his office including his secretary. He indicated that he, along with most super wealth people, makes most of his income from capital gains, which are taxed at 15%. This compares to up to 35% taxes for those who earn primarily ordinary income. For this reason, his tax rate was skewed towards the 15% rate.

Since the publication of the op-ed, President Obama has continually spoken about the wealthiest Americans having a tax rate lower than their secretaries. What he fails to explain is that only about 0.1% of the tax payers in America are super wealthy, and most of the people earning millions of dollars each year have a relatively small amount of capital gains income. For this reason, their tax rates are far greater, usually exceeding 30% for federal tax purposes.

If the capital gains tax rate were to be increased to 20% or 30% or even 35%, the vast majority of those people earning up to $10 million annually would be affected only to a small degree. Keep in mind, one would need to sell assets of $20 million for a 5% gain to earn $1 million of capital gains, or $100 million to produce $5 million of capital gains. Very few people earning $5-$10 million annually (pretax) have assets (or earnings from them) large enough to generate those types of capital gains.

The Buffett Rule would yield a relatively small amount of increased revenue for the Treasury. Frankly, I do not object to the proposal out of hand; but one must be concerned about the derivative impact of changing the capital gains tax rate on investment income in this country. Would it hurt job creation? Probably.