During his State of the Union address, President Obama proposed that Congress enact his “Buffett Rule,” inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.
President Obama said, “Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes.”
This might mean that Congress would enact a new minimum tax of 30 percent for those with incomes over $1 million. But a simpler way to implement the Buffett Rule would be to simply end the tax preference for capital gains and stock dividends, which is the reason people like Mitt Romney and Warren Buffett can pay such low tax rates.
CTJ Report Explains Why Romney and Buffett Pay Such Low Tax Rates
A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.
As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).
The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.
For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent.
This problem could be largely solved by doing what President Reagan did with the Tax Reform Act of 1986, which taxed all income at the same rates.