Buffett Rule vs. Romney Rule: Which Will Grow America's Economy?


The opening salvos of the 2012 presidential election are being shot across the battlefield, and in a new line of attack from the Obama administration, Vice President Joe Biden has coined a new term "Romney Rule" to contrast with President Obama's plan to enact the "Buffett Rule." Is the Romney Rule or the Buffett Rule a sounder model for long-term economic growth? Will income inequality and the perceived fairness of the tax code be the most important battle of the election?

Let's first review the details of the Buffett Rule. The Buffett Rule is designed to reduce income inequality in the U.S. It gets its name from famed investor Warren Buffett, who has actively argued against the fact that he pays a lower effective tax rate than his secretary due to the tax law that treats investment income differently from ordinary income. Since Warren Buffett makes most of his money through investment income, he is taxed at a much lower effective tax rate than his secretary that make ordinary income.

The Buffett Rule works by setting a minimum effective tax rate on all income over 1 million dollars, which ramps up to a 30% effective tax rate once someone earns 2 million or more dollars a year. Simply put, it will not matter if you earn most of your money through investments. If you make over $1 million a year from any source, the Buffett Rule will kick in and your effective tax rate will rise to 30% (if it isn't that high already).

By contrast, the Romney Rule relates to Romney's stance on extending and expanding the Bush tax cuts to the very wealthy. Obama wants to let the Bush tax cuts on the very rich expire.

So which model is the sounder model for long-term economic growth? I have to pick the Buffett Rule. This is a tough for me to admit because I am not only a Mitt Romney supporter, but I also supported the Bush tax cuts when they were originally passed. But, the fact isthat we are living in different times . Our debt as a percent of GDP is over 100%. The only other time in history this occurred was during World War II. How did we bring the debt down after WWII? We raised taxes (the top rate was increased to an all-time high of 94% in 1944) and immediately afterwards sustained a high rate of inflation for several years (annual inflation in 1946, 1947, and 1948 was 8.43%, 14.65%, and 7.74% respectively). While our debt was over 106% of GDP after WWII, it lowered to less than 67% of GDP in 1951.

Given the poor economic climate , I cannot support extending the Bush tax cuts any longer, which is what the Romney Rule would do. The harsh reality is that in order to get our debt back down to acceptable levels, we are going to have to cut spending drastically and raise taxes. The Buffett Rule accomplishes the latter, but only barely. The reality is, the Buffett Rule is more of a perception fixer than a debt fixer. It will barely touch the surface of what is needed long-term. In the long run, we will need fundamental tax reform.

With that said, I do believe that income inequality and perceived fairness in the tax code will be the most important battle of the election. President Obama has been laying the groundwork on this issue all year, and now that Mitt Romney is assured the nomination, he will start to attack Romney on the issue. 

Will it work in Obama's favor? Let the games begin!