Later this evening, the U.S. Senate will vote on the so-called Buffett Rule, an Obama Administration proposal that seeks to ensure that households earning more $1 million a year pay at least the same tax rate as middle class families. Introduced as S.2230, “The Paying a Fair Share Act,” by Senator Sheldon Whitehouse (D-RI), this important legislation promotes tax fairness, a balanced first step to deficit reduction, and long-term economic growth.
Under the current Bush-era tax levels, individuals earning more than $1 million per year face a tax rate of 35% for wage income, yet between a range of loopholes, deductions, and preferential treatment of investment income, many of these wealthy individuals are able to shield vast portions of their earnings from Federal income tax—thus reducing their effective tax rates to levels lower than the tax rates faced by middle class families. One recent study showed that more than one-quarter of all millionaires pay less than 26.5% of their income in federal taxes, while 10 million Americans earning less than $100,000 pay more than 26.5% in taxes.
The Buffet Rule addresses this fundamental inequity by creating a minimum 30% effective tax rate for all taxpayers earning more than $1 million in a single year. Under this rule, no one could rely on loopholes and special tax breaks for investment income to pay less than their fair share during a time of unprecedented deficits and economic challenges.
In the face of ongoing budget deficits, the Buffett Rule is expected to raise to between $47 billion and $171 billion in new revenues. Although this legislation will clearly not eliminate the deficit by itself, it provides an important downpayment towards closing the Federal budget shortfall. Perhaps even more critically, it restores the long-standing bi-partisan commitment to balanced deficit reduction that includes new revenues rather than sole reliance on deep cuts to public investments that benefit those most in need.
Given these trends, the Buffet Rule makes a critical step forward in ensuring greater tax fairness, and ultimately, more widely shared prosperity.