April 16, 2012

Mercatus Economists: Buffett Rule Is a Tax Gimmick, Not a Solution

Antony Davies

Senior Affiliated Scholar

Jason J. Fichtner

Former Senior Research Fellow
Summary

The Senate is expected to vote on the Buffett Rule today, but Mercatus Center economists Jason Fichtner and Antony Davies disagree with how the rule is being sold as a cure to our nation's economic distress. The rule seems more about political posturing than addressing today’s problems.

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The Senate is expected to vote on the Buffett Rule today, but Mercatus Center economists Jason Fichtner and Antony Davies disagree with how the rule is being sold as a cure to our nation's economic distress. The rule seems more about political posturing than addressing today’s problems.

“The Buffett Rule employs a new tax gimmick that focuses on marginal tax rates instead of the more accurate average tax rate,” said Davies.

·         Looking at the marginal tax rate instead of the average tax rate is like checking the speedometer (how fast you’re moving) instead of the odometer to see how far you've traveled. Marginal tax rates are the speedometerthey tell you the rate at which taxes are currently coming out of your paycheck. Average tax rates are the car's odometer—they tell you how much you've already actually paid.

·         The top 1 percent pays a marginal rate of 15 percent, while the typical middle-class taxpayer pays a marginal rate of around 30 percent. But the top 1 percent pays an average tax rate (for all federal taxes combined) of almost 30 percent while the typical middle-class American pays an average rate of 14 percent.

“The Buffett Rule does nothing to solve our long-term fiscal challenges, would raise very little revenue, and is actually unfair,” said Fichtner.

·         The top one percent’s share of total federal income taxes is near its highest in decades, and to qualify for the top 1 percent requires around $380,000 in income, not exactly a millionaire.

·         According to the Congressional Joint Committee on Taxation, the Buffett rule would raise only $47 billion over a decade, a far cry from even the $1.2 trillion deficit we face this year alone. Instead we need solutions that decrease the nation's deficit, like reducing spending to between 18 and 19 percent of GDP, a level that matches the U.S. long-run average level of taxes collected since World War II.