Tuesday, October 18, 2011
Tweet[IWS] CRS: AN ANALYSIS OF THE "BUFFET RULE" [7 October 2011]
IWS Documented News Service
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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
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Congressional Research Service (CRS)
An Analysis of the “Buffett Rule”
Thomas L. Hungerford, Specialist in Public Finance
October 7, 2011
http://www.fas.org/sgp/crs/misc/R42043.pdf
[full-text, 14 pages]
Summary
Warren Buffett, the chairman of Berkshire Hathaway, noted that he paid 17.4% of his taxable
income in income and payroll taxes—“a lower percentage than was paid by any of the other 20
people” in his office. He stated that “the mega-rich pay income taxes at a rate of 15 percent on
most of their earnings but pay practically nothing in payroll taxes.” Within a month, the Obama
Administration unveiled a plan for economic growth and deficit reduction. The Administration
stated that one of its principles for tax reform was to observe the “Buffett rule”—“no household
making over $1 million annually should pay a smaller share of its income in taxes than middleclass
families pay.” On October 5, Senator Harry Reid introduced the American Jobs Act of 2011
(S. 1660), which contains a 5.6% surtax on millionaires to pay for the provisions of the jobs bill.
This report examines the Buffett rule, but uses a measure of income that captures the ability to
pay taxes and incorporates the effect of the corporate income tax in addition to the individual
income tax and the payroll tax.
The results of this analysis show that 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. Roughly a quarter of all millionaires (about
94,500 taxpayers) face a tax rate that is lower than the tax rate faced by 10.4 million moderateincome
taxpayers (10% of the moderate-income taxpayers). Tax reforms that are consistent with
the Buffett rule would likely include raising tax rates on capital gains and dividends. For
example, the President has proposed allowing the 2001 and 2003 Bush tax cuts to expire for highincome
taxpayers and taxing carried interests of hedge fund managers as ordinary income as tax
reforms that observe the Buffett rule. Research suggests that these tax reforms are unlikely to
affect many small businesses or to deter saving and investment.
Contents
Individual Income Taxes and Payroll Taxes .................................................................................... 1
The Simple Buffett Rule .................................................................................................................. 2
The Buffett Rule with a Broader Measure of Income and Taxes..................................................... 3
Issues................................................................................................................................................ 6
Small Business and Job Creation............................................................................................... 7
Saving and Investment .............................................................................................................. 8
Concluding Remarks ....................................................................................................................... 9
Figures
Figure 1. Tax Rates by Taxable Income Category ........................................................................... 3
Figure 2. Tax Rates by Adjusted Gross Income Category ............................................................... 6
Tables
Table 1. Tax Rates of Business Owners by Adjusted Gross Income Category................................ 8
Table A-1. Number of Sample Observations ................................................................................. 10
Table A-2. Tax Rates by Taxable Income Category....................................................................... 11
Table A-3. Tax Rates by Adjusted Gross Income Category........................................................... 11
Appendixes
Appendix. Data .............................................................................................................................. 10
Contacts
Author Contact Information........................................................................................................... 11
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Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 262-6041
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
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