How would the 'Buffett rule' affect marginal tax rates?
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Donald Marron Guest blogger
President Obama鈥檚 latest budget endorses聽a 鈥淏uffett rule鈥澛犫�� a new floor on taxes paid by folks with very high incomes. His rule聽would require that 鈥渢hose making over $1 million should pay no less than 30 percent of their income in taxes.鈥�
The president didn鈥檛 offer many聽specifics about how the rule would actually work. Up on Capitol Hill, however, Senator Sheldon Whitehouse and Representative Tammy Baldwin have聽 introduced legislation that would implement a 30% minimum tax. That legislation addresses key technical issues such as which taxes to include, what measure of income to use, and how to phase-in the tax so that there isn鈥檛 a giant spike when someone鈥檚 income rises from $999,999 to $1 million. For more information,聽including TPC鈥檚 estimates of the distributional impacts, please see by TPC鈥檚 Roberton Williams.
TPC鈥漵 Daniel Baneman has examined how the PFSA聽would affect marginal tax rates 鈥� i.e., the effective tax rate that would apply if a person earned an additional dollar. comparing the PFSA to current policy (i.e., the taxes that would be in effect if all the expiring tax cuts get extended at the end of the year, except for the payroll tax holiday):
As you can see, the Buffett rule聽would have little effect on the tax rate on wages and salaries. The real action is in capital gains:
Effective marginal tax rates on capital gains would nearly double from 18 percent (under current policy) to 34 percent for taxpayers with incomes between $1 million and $2 million, and would climb to 29 percent for taxpayers with incomes over $2 million. That jump shouldn鈥檛 come as a surprise. As Warren Buffett has been telling us, high-income taxpayers who face low tax rates tend to have lots of capital gains, which are currently taxed far below the fair share tax rate of 30 percent. (If you鈥檙e wondering, taxpayers with incomes between $1 million and $2 million face a higher effective marginal rate than taxpayers with incomes over $2 million because the fair share tax phases in over that range.)
If investors ever聽expect that the Buffett rule will actually go into effect, expect them to realize lots of capital gains early. Update (I forgot to include the second half of that thought): After that, realizations will be significantly lower than they would be under current tax rules. That cuts into the potential revenue from the Buffett rule.
