Study: ‘Buffet Rule’ Wouldn’t Come Close to Obama’s Pledge to ‘Replace’ AMT

March 21, 2012 - 5:43 PM
Obama Energy

President Barack Obama speaks at Copper Mountain Solar 1 Facility in Boulder City, Nev.,Wednesday, March, 21, 2012. (AP Photo/Pablo Martinez Monsivais)

(CNSNews.com) – President Barack Obama wants his so called “Buffett rule” to replace the unpopular Alternative Minimum Tax, but the AMT is projected to raise about 18 times more in federal revenue than the “Buffett Rule” could, according to the non-partisan Joint Committee on Taxation.

Obama has made the tax hike on high income earners – a proposal named for billionaire investor Warren Buffet who complains that he pays a lower tax rate than his secretary – a central theme of his fiscal year 2013 budget proposal and of his 2012 reelection campaign.

Obama’s fiscal year 2013 budget proposal said, “And he is proposing that the Buffett rule should replace the Alternative Minimum Tax, which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended.”

The Obama budget proposal said, “No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. And, the President is now specifically proposing that in observance of the Buffett rule, those making over $1 million should pay no less than 30 percent of their income in taxes.

“The Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions,” the proposal said.

Under the current tax code, the highest rate for investment income is 15 percent. The highest tax rate for wages is 35 percent. Thus, someone who makes low wage income, but is wealthy from investment income like Buffett, chairman of Berkshire Hathaway, could pay a lower percentage in federal taxes than someone who earns less in wage income.

Obama and Democrats in Congress also support letting the Bush tax cuts expire in 2013, which would increase the top income tax rate to 39.6 percent and 20 percent for capital gains taxes, as well as a 3.8 percent increase on net investment income.

The AMT was enacted in 1969, with the intent to target high-income earners subject to numerous exemptions under the Internal Revenue Code, in order to ensure that the wealthiest did not escape taxes regardless of available exemptions. But it was never adjusted for inflation and affects a larger number of taxpayers every year. As a political matter, it is generally adjusted annually to shield some middle-income earners.

The AMT also became a significant revenue source, and is projected to raise $864 billion in revenue from 2012 to 2022, according to an analysis by the Joint Committee on Taxation, the non-partisan tax research arm of Congress.

The “Buffett rule,” as defined by recent Senate legislation, if enacted, would raise just $47.6 billion in revenue over that same time span, according to a JCT analysis released Tuesday. That revenue would have to be multiplied 18 times to replace the projected revenue from the AMT.

Obama has defined the “Buffett rule” as ensuring households making more than $1 million annually pay at least 30 percent of their income in taxes.

“This Congress could hold a vote on the Buffett Rule so that we don’t have billionaires paying a lower tax rate than their secretaries,” Obama said in a March 6 White House press conference. “That’s just common sense. The vast majority of Americans believe it’s common sense and if we’re serious about paying down our deficit, it’s as good a place to start as any.”

In early February, Sen. Sheldon Whitehouse (D-R.I.) introduced a bill, the Fair Share Act, to codify the “Buffett rule” into law, which was submitted to the JCT to review.

“It’s time to give middle class families in Rhode Island and across the country the straight deal they deserve,” Whitehouse said in a statement. “As we continue working to restore our economy, it’s more important than ever to make sure all Americans are paying their fair share toward our nation’s success – and right now that just isn’t happening.

“It’s inexcusable that our tax system permits ultra-high income earners to pay a lower tax rate than a truck driver or a janitor, and this legislation would help fix that unfair system,” Whitehouse added.

Later in the month, Buffett wrote a letter to Whitehouse saying he was “delighted” with the bill. “I have no problem endorsing any large step in the direction of greater fairness in the tax code,” Buffet added.

Sen. Orrin Hatch (R-Utah), ranking member of the Senate Finance Committee, said the less than $5 billion per year in revenue from the legislation would be less than 0.3 percent of our $15.6 trillion national debt and amounts to one week of fiscal year 2011 interest payments.

“The president’s so-called Buffett rule is a dog that just won’t hunt,” Hatch said in a statement. “It was designed for no other reason than politics – there is no economic rationale for it.

“It would do little to bring down the debt, wouldn’t come close to getting rid of the Alternative Minimum Tax and would make our tax code even more complex than it already is. Now that we have this analysis, I hope the President will stop the class warfare and start leading by putting out real proposals to bring down our debt, get rid of the AMT and reform our broken tax code,” he added.

Earlier this week, an analysis by the Tax Policy Institute, a non-profit tax research organization, drew the same conclusion.

“Why does the AMT generate so much more revenue than the Fair Share tax? The biggest reason is that the AMT simply hits a much bigger chunk of taxpayers,” the analysis said.

“By design, the Fair Share tax wouldn’t affect anyone making less than $1 million. Yet 96 percent of AMT taxpayers have incomes under $1 million, accounting for 77 percent of all AMT revenue. The Fair Share tax would need to start at a much lower income level to make up the lost revenue from the AMT,” it added.

The “Buffett Rule” would only affect 94,500 taxpayers nationally, according to a report last year from the Congressional Research Service, the non-partisan research arm of Congress.

The CRS study released on Oct. 7, 2011, says, “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 moderate income 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,” the October CRS report continued. “For example, the president has proposed allowing the 2001 and 2003 Bush tax cuts to expire for high income 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,” the report added.