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The real effect of the 'Buffett rule'

Expect to hear a lot of political rhetoric this election year. But how many taxpayers and businesses would really be affected by the proposed tax increase?

By MSN Money Partner Apr 16, 2012 2:18PM

This post is by Alan Fram of The Associated Press.


President Barack Obama's proposal to impose a "Buffett rule" tax on the rich is generating enormous political wattage, but the plan itself would directly affect only a tiny fraction of Americans.


Only around 210,000 taxpayers -- a bit over 1 of every 1,000 -- would face higher federal taxes if the measure were enacted, according to an estimate by one respected bipartisan research group.


In addition, while Republicans say the plan would be a job killer, only a small proportion of businesses would potentially be subject to the tax, according to data from a 2011 Treasury Department study. These firms make disproportionately large amounts of money, but many of them don't employ any workers.


Republicans, calling the Buffett rule a political sideshow designed to distract voters from the economy's problems, seem certain to round up enough votes to block the bill when the Democratic-run Senate votes on it Monday. But Democrats are eager to hold repeated votes on it this election year to demonstrate that they favor economic equality while Republicans prefer coddling the wealthy, so it's unlikely to disappear soon.


Following are some questions and answers about the proposal and its potential impact (post continues below video):

Q: What would the Buffett rule do?


A: Citing complaints from billionaire Warren Buffett that he pays a lower tax rate than his secretary, Obama says everyone earning at $1 million a year or more should pay at least 30% of his or her income in taxes. He has been vague on details.


Monday's Senate vote will be on legislation by Sen. Sheldon Whitehouse, D-R.I., who would impose the 30% tax on people making at least $2 million annually and phase it in gradually for those earning at least $1 million.


Q: Isn't the top income tax rate already 35%?


A: Yes, that is the rate owed this year on salaries over $388,350. Yet very few people pay that rate because they get to subtract credits and deductions. In addition, some sources of income like certain dividends and capital gains -- more common among upscale earners -- are taxed at a lower, 15% rate.


As a result, households making more than $1 million in 2011 owed an average of around 25% of their earnings in federal income taxes and payroll taxes for Social Security and Medicare, according to the Tax Policy Center, a nonpartisan group in Washington that studies federal taxes.


Q: How does that compare to lower earners?


A: On average -- and that is the key -- the rich pay higher rates. The center computes that families earning $30,000 to $40,000 owed an average 6% of it in income and payroll taxes last year. People making $50,000 to $75,000 owed an average 12%, while those making $75,000 to $100,000 paid an average 13%.


Q: Then what's the problem?


A: The White House says it's not the averages that bother them. It's that thousands of individual million-dollar earners pay lower rates than millions of middle-income workers.


Citing Internal Revenue Service data, the White House says 22,000 households making more than $1 million paid less than 15% of their earnings in federal income and payroll taxes. That includes 1,470 such families who paid nothing in federal income taxes.


Q: So where does Obama's 30% figure come from?


A: White House officials said last week that they want no household earning more than $1 million a year paying a smaller portion of its income in taxes than the middle class. While the term "middle class" is imprecise, IRS data show that the administration would come very close to that target by imposing a 30% tax on the highest earners. Out of around 27 million taxpayers who earned $50,000 to $100,000 in 2009, only around 2,000 ended up paying income tax rates of 30% or more.


Q: Overall, how many taxpayers would have to pay more if the Buffett rule becomes law?


A: The Tax Policy Center projects that there will be 438,000 households earning $1 million or more annually in 2015, the year they examined to give presidential candidates' tax plans time to be enacted and take effect. Of those taxpayers, the center expects around 210,000 to face higher taxes if legislation like the Senate Democratic bill becomes law. That is just over one-tenth of one percent of all 169 million taxpayers.


Q: What impact would the Buffett rule have on businesses?


A: The Buffett rule would apply to individual income tax rates. It would not apply to the taxes that corporations pay, although Obama has separately proposed to increase taxes on some corporations including some that do work abroad.


Yet the proposal would still affect thousands of companies, from the local bakery to hugely profitable law firms, whose owners pay individual income taxes on the earnings, not corporate taxes. Republicans say taxing these companies would snatch away money they could otherwise use to create jobs -- a damaging move with the economy still laboring to recover from the recession.


Q: Are there many of these companies?


A: In a paper last August, Treasury researchers analyzing tax data found that around 35 million individual tax returns reported some business income but just 331,000 of them -- about 1% -- were for earners making $1 million and up.


Of those 331,000 business taxpayers earning at least $1 million, just 200,000 were employers, the study found.


Those 200,000 high-income employers accounted for just 5% of all employers filing business earnings on their individual returns. But they reported $189 billion in business income -- a disproportionately huge 50% of all business earnings reported by such employers.


Republicans say it would inhibit job creation to tax away those large firms' earnings. Democrats argue the figures show how few high-earning taxpayers actually hire people.


The Treasury figures were for the 2007 tax year, the most recent available.


Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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Apr 16, 2012 4:36PM
What does 'economic equality ' mean? I am not the millionaire bracket by any means but just taking from the wealthy because they are wealthy makes me sick. I see no reason why anyone in thier right mind would not support a 15% federal sales tax and blow off the income tax idea. Everyone whould be paying the same and for the socialists --- the rich never stop spending.
Apr 17, 2012 2:19PM
The Buffet rule ia a bad rule because this is a democracy.  In a democracy, the majority can vote to steal from a small minority with impunity.  This is not a way to develop and maintain a healthy and productive society.  It also engenders class warfare and rising irresponsibility.  Of course, it is reasonable and probably productive for the tax burden to be correlated with income level.  But the right way to achieve that is to make comprehensive proposals that deal with the tax rules for all citizens so that at each income level, it can be seen that the burden is being shared.  It is also important that government spending on welfare of the society benefit all of society, and that welfare spent by government for individuals be limited to a very small minority of individuals--those who are truly needy and incapable of caring for themselves.  Our tax system must be supported by every level of society.

Apr 29, 2012 6:36AM
Having a millionaire pay a lower rate than his/her secretary is WRONG! As for capital gains, it's money earned, and should be taxed same as any other income. people who inherit wealth pay 15% and neve work a day in their lives., WHILE THE REST OF US PAY FOR THEIR SHARE OF KEEPING THE COUNTRY RUNNING. UNFAIR!!
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