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[IWS] CRS: AN ANALYSIS OF THE "BUFFET RULE" [7 October 2011]

IWS Documented News Service
_______________________________
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
________________________________________________________________________

 

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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This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

****************************************
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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