David R. Henderson  

Megan McArdle on the "Buffett Rule"

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Megan McArdle has an excellent post today on the so-called Buffett tax rule. That's the idea that high-income people should pay some minimum percent of their income in federal taxes.

After demolishing the case, pointing out that to trap every single millionaire would involve violating the rule of law--see her post for why--she goes on to write:

Even if you dismiss the above as so much airy fairy theorizing in the face of REAL WORLD PROBLEMS, the fact is that as far as I can tell, the Obama Administration itself has not outlined anything of the sort. At least in the White House document that I read, I saw no proposal to set some sort of AMT [Alternative Minimum Tax] on millionaires. Instead, it claims to do this, while rehashing a bunch of things that the administration has long proposed: allowing the Bush tax cuts to expire for those making more than $250,000; changing the treatment of carried interest income accrued from capital gains; and altering the treatment of deductions for very high earners. If all of these things were passed, guess who would still pay a lower effective tax rate than his secretary? Hint: his initials are WB, and he lives in Omaha, Nebraska.

If a "Buffett Rule" is such a great idea, how come the administration doesn't actually propose enacting one?

Presumably for some of the following reasons: it would add complexity to the tax code; it might not be possible to do in a way that would stand up even in our very IRS-friendly tax courts; it would have upsetting effects on the market for various forms of capital, particularly municipal bonds; it might well involve taking away deductions that less well-heeled voters currently enjoy, and they'd freak out. Note that I do not include "Republican obstructionism" on this list, because the existing proposals won't pass the house; there's no reason not to include a real hard "Buffett Rule" if they think such a thing is even vaguely workable. From the fact that they didn't, I infer that they thought the idea maybe had some problems.

So no, I don't think that it's unreasonable for Fox News to be dismissive. The administration seems to have dismissed the idea as well.


Incidentally, most of the discussants of this idea, on both sides, fail to distinguish between "the rich"--the apparent targets of the proposed tax--and high-income people--the actual targets. There's a very strong positive correlation between wealth and income, but it's not close to 1.0.


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CATEGORIES: Taxation



COMMENTS (11 to date)
Paul writes:

Megan may be capable of creating some hypothetical scenario where a millionaire will still pay a low rate no matter what, but that misses the point. Right now it is perceived to be a much more common occurrence than it should be. Ironically the way to make Obama's tax proposal closer to the Buffett rule would be tax capital gains like normal income since the lower capital gains rate is the primary driver of the discrepancy. Even better I find it highly implausible than an individual who has a capital gain that large would not be wealthy which minimizes the "taxing the wealthy as opposed to the non-wealthy high income person problem" (if you consider that to be a problem). Somehow I doubt Megan would be on board for such a proposal...

Megan McArdle writes:

Actually, I support a radically simplified tax code that eliminates the corporate income tax in exchange for equalizing the treatment of capital gains and dividends in the personal income tax; I've been writing about this for years.

Paul writes:

Fair enough. Believe it or not I have read your arguments about it and they are worth discussing. That being said I don't get the impression that you would support taxing capital gains and dividends as income without eliminating the corporate income tax. Given that the Obama plan is supposed to raise significant new revenue the theoretical proposal I said you wouldn't support implicitly assumed that there wouldn't be an offsetting elimination in corporate taxes. My mistake for being vague although I am curious as to whether you support taxing capital gains and dividends as income generally or only with the corresponding reduction in corporate taxes.

Megan McArdle writes:

No, because for high earners--who have most of the capital--that would lower the return from deferring consumption by about 50%. This seems like a bad idea.

Jehu writes:

Why not simply let companies expense dividends, just like wages and interest that they pay, and make dividends taxed to individuals as ordinary income?

Yancey Ward writes:

Paul,

As the owners of the corporation, the corporate tax is paid by shareholders, and no one else. The reason you have capital gains and dividends taxed differently from other income is because the corporate rate and the dividend/capital gains tax forms an aggregate tax on shareholders that is well in excess of the 15% rate that progressives are incessantly complaining about. If you are truly interested in being fair (and I doubt that you are), you would acknowledge the reality of this double tax. What say you?

Yancey Ward writes:

From Greg Mankiw:

Link

Paul writes:

Yancey,

I would say that if you have a competent CFO there is no reason you would be paying anywhere near the statutory corporate tax rate so that is kind of a moot point. I was simply positing that there is a very simple way to make the current tax code closer to the "Buffett rule" (note I did not comment on fairness and I noted earlier that I am willing to discuss Megan's arguments about corporate taxation) and that just because Megan can construct some hypothetical millionaire who in one year might pay a lower rate than their secretary doesn't mean it isn't pretty theoretically simple to assure that it doesn't happen every year.

Honestly if I had my way I'd scrap the entire tax system and implement a combination of a progressive consumption tax and pigovian taxes although it's a pipe dream so I don't bother bringing it up.

As for Mankiw's link I think it's a nice distraction, but at the end of the day it's not just about how taxes are collected, but overall government policy that determines progressivity (I will admit that many liberals forget this fact). As I noted earlier my ideal system would be a hell of a lot different than the current one (as would government policy), but since that is politically infeasible I am choosing to focus my comments in the context of the current (admittedly messed up) tax code.

Yancey Ward writes:

Paul,

A distraction? I know it is common to think that corporations avoid taxation, but that is mostly avoiding taxation on overseas profits, which still don't escape taxation, but face it in those overseas jurisdictions (as do foreign corporations doing business in the US). Mankiw's link explicitly shows that you don't need a Buffet rule since the belief that high income people pay a lower percentage of income in taxes is fundamentally wrong. Do you acknowledge that the dividend/capital gains tax combined with the corporate income tax already ensures that most high income people pay more of their income in total taxes than a middle income person? If we can't even agree on what the facts are, then we are at an impasse.

Paul writes:

Yancey,

Yes I view it as a distraction. Why? Because the whole argument surrounding the "Buffett rule" isn't that ALL high income people pay a lower percentage of income in taxes, but that there are a lot that do.

http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3204&DocTypeID=1 demonstrates this point easily without including regressive state and local taxes. 40% of individuals with income between 30 and 40k pay more than 12.9% in taxes while 25% of individuals with income over a million pay less less than 12.6%.

As to your argument about double taxation there are significant loopholes in the tax code for domestic (not just overseas) corporate profits, capital gains can be deferred indefinitely until they can be offset with capital losses and dividends can easily be sheltered by putting them into a tax exempt vehicle such as a retirement plan. So yes it is true that most high income people do pay more in taxes than the poor. However that ignores the fact that there is a nontrivial percentage of the high income population that does pay less and showing a chart with averages does not change that. Therefore I classify Mankiw's chart as an irrelevant distraction when considering a "Buffett rule".

In any event this entire discussion has gotten off track. I've already made it clear that given a choice I wouldn't vote for anything near the current tax code and I view progressivity as a function both of government policy and tax collection. In my original comment on this post I was merely pointing out that I don't think the "Buffett rule" argument can be dismissed as easily as Megan claims before you chose to rip my head off and claim I am ignoring reality.

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