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The Buffet Rule: A Basic Principle of Tax Fairness

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The Buffett Rule is the basic principle that no household making over $1 million annually should pay a smaller share of their income in taxes than middle-class families pay.

Warren Buffett has famously stated that he pays a lower tax rate than his secretary, but as this report documents this situation is not uncommon. This situation is the result of decades of the tax system being tilted in favor of high-income households at the expense of the middle class. Not only is this unfair, it can also be economically inefficient by providing opportunities for tax planning and distorting decisions. The President has proposed the Buffett Rule as a basic rule of tax fairness that should be met in tax reform. To achieve this principle, the President has proposed that no millionaire pay less than 30 percent of their income in taxes.

In his State of the Union address, President Obama called for comprehensive tax reform that cuts rates, cuts inefficient tax loopholes, cuts the deficit, increases job creation and growth, and sets out a very simple principle of fairness: No household making over $1 million annually should pay a smaller share of income in taxes than middle-class families pay. To achieve this, the President has proposed that no millionaire pay less than 30 percent of their income in taxes.
This is the “Buffett Rule.” As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s—and that is wrong. To be clear, there is tremendous variation in tax rates for high-income households, with many, like small business owners who receive primarily labor income and take advantage of few special tax benefits, paying taxes at an effective rate not dramatically lower than their statutory rate. But as a recent analysis by the Congressional Research Service concluded, “the current U.S. tax system violates the Buffett rule in that a large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers.”
This basic source of unfairness is what this principle would address, by limiting the degree to which the most well-off can take advantage of tax expenditures and preferential rates on certain income. In a time when all Americans are being asked to come together to make the sort of shared sacrifices that will allow our country to continue making the crucial investments that are necessary to grow our economy, continuing to allow some of the wealthiest Americans to use special tax breaks to avoid paying their fair share simply cannot be justified. Moreover, addressing these inequities through tax reform that includes a Buffett Rule can also improve the efficiency of the tax system by discouraging tax planning and reducing distortions to behavior.

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