What Is the Buffett Rule?
The “Buffett Rule” was part of the tax plan proposed by President Barack Obama in 2011. It was a fair share tax and it got its name from billionaire investor Warren Buffett who famously stated that it was wrong that he paid a lower tax rate than his secretary.
Key Takeaways
- The Buffett Rule tax plan proposed a 30% minimum tax on people making more than $1 million a year.
- The rule was part of President Barack Obama's 2011 tax proposal.
- It was named after Warren Buffett, who criticized a tax system that allowed him to pay a lower tax rate than his secretary.
- The Buffett Rule contends that the tax system is not fair because it puts a greater proportional tax burden on wages than it does on investment income.
- The goal of the Buffett Rule is to bring about tax relief for the middle class and those whose earnings are less.
- Critics state that the Buffett Rule is effectively a capital gains tax rate hike that would hurt business growth.
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Understanding the Buffett Rule
The Buffett Rule contends that the tax system isn't fair because it puts a greater proportional tax burden on wages than it does on investment income. Middle-class taxpayers shoulder this burden because their income primarily consists of wages that are subjected to income, payroll, and other federal taxes. Upper-class income consists primarily of investment income taxed at preferential capital gains rates.
The Rule blames tax code bias for an unfair tax system that forces many middle-class workers to pay a larger proportion of their income in taxes than the wealthy do. The Buffett Rule seeks to remedy the bias by requiring millionaires to pay at least 30% of their post-charitable contribution income in taxes.
The Paying a Fair Share Act
The Buffett Rule inspired legislation known as the "Paying a Fair Share Act.” The Act was first introduced in the Senate in March 2012 and it was ultimately rejected by Congress about a month later.
It would have amended the Internal Revenue Code (IRC) to support the Buffett Rule by targeting married filing-jointly taxpayers with adjusted gross incomes of more than $1 million after they took all available credits and deductions provided by the IRC. It proposed a minimum tax rate of 30% on these individuals, just as the Buffett Rule suggests.
Biden's Tax Proposal on the Wealthy
Similar legislation has been introduced and rejected in subsequent years. Another "Paying a Fair Share Act" was brought before the Senate on April 18, 2023. It, too, touted Buffett's philosophy that the wealthy should pay a fair share of the country's tax burden that he asserts falls most heavily on the middle class. The Act adopted the same $1 million and 30% guidelines but it had shown no further activity as of August of 2023.
The 2024 fiscal year budget proposed by President Joe Biden laid out provisions by which the tax code could achieve these numbers. Biden has suggested that the top tax rate of 39.6% should be restored. President Donald Trump's Tax Cuts and Jobs Act (TCJA) slashed this rate to 37% in 2017.
The TCJA is set to expire at the end of 2025 if Congress doesn't take steps to renew it or at least breathe new life into some of its provisions.
Biden's proposal also takes steps to help the middle-income taxpayers that Buffett has expressed concern for, increasing the Child Tax Credit and making it fully refundable.
Criticism of the Buffett Rule
Critics state that the Buffett Rule is effectively a capital gains tax rate hike that would have a chilling effect on business growth. Proponents of the Buffett Rule claim that it's the first step to closing a tax loophole with a measure of tax impartiality.
$124.3 Billion
Warren Buffett's net worth as of August 2023 was $118.9 billion, making him the fifth richest person in the world.
They remind critics that tax code bias helps the very wealthy avoid taxes so they pay an average effective federal tax rate far short of the top marginal rate they should be paying. They believe the Buffett Rule can usher in middle-class tax relief by making sure that the wealthy pay as large a share of their income in taxes as the middle class does.
How Do Billionaires Avoid Taxes?
There are plenty of methods that billionaires use to avoid paying taxes, much of it coming down to taking advantage of the tax code. Many billionaires pay themselves low salaries in the companies they run, while the bulk of their wealth is tied up in various investments. They can borrow against these assets to fund any lifestyle costs as opposed to selling the assets and incurring a capital gains tax. The wealthy also use write-offs and tax deductions to reduce their net income, sometimes to a net loss, to avoid having to pay any taxes at all.
What Does Warren Buffett Say About Investing?
Warren Buffett has a lot to say about investing. Much of it boils down to healthy financial habits. He believes individuals should live within their means and not overspend, that people should avoid debt, particularly credit card debt, and that they should save. Returns should be reinvested. People should invest in low-cost index portfolios and in themselves. They should keep cash on hand.
What Does Warren Buffett Say About Taxes?
Warren Buffett believes that wealthy people are undertaxed compared to the general population. He believes wealthier people should be taxed more and he's taken steps to attempt a change in tax policy to make this happen. Bill Gates, a close friend and colleague of Buffett's, also agrees that the wealthy are not taxed enough and that this should be changed.
The Bottom Line
Warren Buffett's secretary might not have become a household name when Buffett compared their tax situation to his own, but this individual's predicament creates a pretty clear picture as to why Buffett believes that it's necessary to implement his rule into the tax code. The IRC taxes wages more strenuously than it does investment income.
Keep an eye on ongoing legislation that's intended to salute the Buffett Rule and shift some of the tax burden to high-income Americans. You might not feel like you're affected by a higher tax imposed on the wealthy but ongoing changes to the Child Tax Credit and other tax breaks for the middle class are often afoot as well.
