The Buffett Rule and Taxing the Ultra-Wealthy

Over the past 30 years, the divide between the wealthy and the rest of America has ballooned. The "great contraction" of the past few years has only accelerated the trend. Recently, the top 1% owned approximately one-third of the nation's wealth; the top 10% own more than half. Soaring sales at Coach (NYSE: COH  ) and lululemon athletica (Nasdaq: LULU  ) alongside weak numbers at Best Buy (NYSE: BBY  ) and Aeropostale (NYSE: ARO  ) attest to a redistribution of wealth toward the top.

Much of the increasing disparity results from tax policies that disproportionately favor the wealthy, ranging from various tax breaks to the 15% capital gains tax rate. Since the ultra-wealthy make the majority of their income from investing, rather than wages, they tend to pay a lower rate. Additionally, employees at private equity shops like Blackstone (NYSE: BX  ) have been able to have their income taxed at the much lower capital gains rate.

Last month, Warren Buffett, the world's third-richest person, took to the op-ed pages to argue that, at a time of national hand-wringing about budget deficits, it's absurd he pays a lower tax rate than his secretary:

The megarich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It's a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot. ...

My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice.

That op-ed spurred President Barack Obama to propose the "Buffett Rule" over the weekend, which would essentially require everyone making more than $1 million a year to pay at least the same tax rate as middle-income taxpayers.

In a recent appearance on the CBC's Lang and O'Leary Exchange, Motley Fool macroeconomics editor Ilan Moscovitz discussed Buffett's op-ed, noted that U.S. economic growth isn't particularly dependent on low tax rates for the wealthy, and answered some questions about tax options for the U.S.

You can see the interview, which begins at the 36:50 mark, here.

What do you think of the proposed Buffett Rule? Share your thoughts in the comment box below. You can also check out more Foolish coverage on the Buffett Rule and taxes here:

A previous version of this article mistakenly suggested that some employees at American Capital have their income taxed as carried interest. The Fool regrets the error.

Ilan Moscovitz owns shares of Lululemon. The Motley Fool owns shares of Best Buy, Coach, lululemon athletica, and Aeropostale. Motley Fool newsletter services have recommended buying shares of Coach and lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On September 19, 2011, at 4:15 PM, carlbrowne wrote:

    I don't understand. If Buffett owns say, $40 billion in Berkshire stock, and those shares represent, say, $4 billion of Berkshire's earnings, and Berkshire's tax rate is 35%, then Buffett is responsible for $1.4 billion in federal revenue. On top of that, Buffett has to pay another 15% if Berkshire declares a dividend and ANOTHER 15% in capital gains if he sells his shares. How does this favor the rich?

    Somebody please tell me what difference it makes if taxes are paid at the corporate or at the personal level. Looks to me that Buffett's getting a worse deal, not a better one.

    I also don't understand the importance of the size of the gap between rich and poor or why anyone thinks something should be done about it. America's system is the most meritocratic in human history, a gap is to be expected, although by historical standards it's exteremly low. As long as the standard of living rises for everyone over time (and it does) why should anyone care?

    When will we finally bury Marx?

  • Report this Comment On September 19, 2011, at 4:22 PM, TMFHousel wrote:

    The double taxation of dividends is a valid point, but frankly, everything is a continual chain of taxation. I pay income tax, and what's left over is subject to sales tax when i spend it, which is taxed as income for the company i spend it at, which also has to pay payroll taxes when they use the revenue to pay employees, whom also pay income tax and sales tax etc etc etc etc.

  • Report this Comment On September 19, 2011, at 6:05 PM, takutourist wrote:

    We Fools are studying and analyzing companies like mad so we, too, can become part of the wealthy. Or, at best, provide ourselves a secure and lucrative retirement.

    carlbrowne and TMFHousel both correctly suggest the wealthy, including Warren Buffet (my portfolio has many Buffet stocks in it) pay many taxes that go unrecognized by those who would demand even more from them.

  • Report this Comment On September 19, 2011, at 6:25 PM, mij3 wrote:

    It is so refreshing to see that someone who has it want to see the rest of those people with very high incomes pay their fair share..I for one am proud of Buffet's stance...Don't care who is against it..It is about time someone stood up for what's right

  • Report this Comment On September 19, 2011, at 7:07 PM, overley wrote:

    The wealthy will always have the clout to get special treatment under the tax code with their use of loopholes and trusts to bypass taxes the rest of us pay. He does not advocate a flat tax with no deductions whatsoever. Maybe I am too skeptical, but Mr Buffett always comes out smelling like a rose because he uses the tax system for his own benefit, eg estate taxes destroying family businesses that he and his kind can buy at a discount to pay death taxes.

  • Report this Comment On September 20, 2011, at 1:37 AM, shckr7 wrote:

    That's one of the worst counter arguments I have heard regarding double taxation of dividend income.

    The simple fact is that business/shareholder did not pay a 15% tax rate. It was significantly higher than that. You want "the rich" to pay a higher rate in taxes? Fine. But let's not pretend that capital gains, in the form of dividends is properly being properly reflected on that shareholder by stating that their tax burden was only 15%. At best, for those that understand this, that is disingenuous.

    Instead, I think people should state that a person who makes most of their income off of dividends is carrying a total tax burden of around ~45% (est, and not including state tax), but we think they should pay more (like 60-70%), because they are rich! But let's not play games and state they are only paying 15%. If nothing else, since we want these folks to pay more, let's at least do the honor of recognizing how much they are truly paying.

    (I say "these folks," because I will never fall into this group. Well, not until this new proposed tax affects lots of other people, the same way AMT was only a tax on the rich. Hah!)

  • Report this Comment On September 20, 2011, at 1:50 PM, carlbrowne wrote:

    My chief worry is that roughly 50% of Americans pay no federal income tax. How can you make a serious argument that "the rich" are not paying their fair share when the top half pays for everything and the bottom half pays nothing?

    If ever a significant majority pays no tax, then I worry for our republic. It will be very much like two wolves and a sheep "voting" on the choice of menu.

  • Report this Comment On September 20, 2011, at 3:57 PM, ODM72 wrote:

    That is probably the most unusual, and ridiculous, argument I have heard (although I hear it a lot from republicans and want-to-be wealthy people). I must have missed the part in my tax courses where they discussed adding a corporations taxes to an individual’s to come up with that individual’s total tax rate. I can’t believe that the Wizard of Wall Street is too stupid to know how much taxes he actually pays. My goodness, how could he be one of the best investment minds of his generation if he can’t divide the taxes he paid (actually paid) by his income to arrive at his effective tax rate? I am so happy that all of you really smart individuals are here to set people like Mr. Buffett, and me, straight.

    Thank you for the education.

  • Report this Comment On September 21, 2011, at 12:23 AM, elixandre wrote:

    i'm really disappointed by the greed and cruelty masked as libertarianism i see on this site, though i don't know why i didn't expect it.

  • Report this Comment On September 21, 2011, at 2:53 AM, rando101 wrote:

    The example that Obama gave during his speech is false and misleading. He said that a teacher earning $50,000 shouldn't pay a higher tax rate than an investor who makes $50million.

    Under current law, that teacher would have a maximum taxable income of $40,500, after subtracting the standard deduction and personal exemption. The teacher's federal income tax would be $6,250, or 12.5 percent of the $50,000 income. So that statement is false.

    If a Millionaire investor earns $50,000,000 and pays 15% maximum capital gains tax he will pay the Federal Goverment $7,500,000. The investor paid 1200 times more($7,500,000/$6,250=1200) to the Federal Goverment than the teacher paid. So the claim that the rich millionaire is not paying his fair share is just Misleading.

    But the burden all Americans are sharing equally is that our current President can't figure out that the Federal Goverment has a spending problem not a revenue problem.

  • Report this Comment On September 21, 2011, at 4:38 AM, CaptainWidget wrote:

    The middle class is the highest tax group in the country. Is it any surprise that not many people want to be middle class anymore? Everyone's going either up or down. It's the only way to live a decent life.

    By raising taxes on the "up" movement pattern, you make it more rewarding to move down.

    Remember, when you subsidize something you get more of it, when you tax something, you get less of it. If we tax the wealthy, we'll get less wealthy. If you subsidize the poor, you get more poor. If you can honestly say that is your ideal for society, then by all means, I suggest we increase taxes on the wealthy and give it to the poor.

  • Report this Comment On September 21, 2011, at 6:05 AM, HectorLemans wrote:

    Ummm...rando101...you might want to re-read what you wrote. Somehow you magically went from tax rate to tax amount in the span of 5 sentences.

  • Report this Comment On September 21, 2011, at 9:06 AM, ihtfp92 wrote:

    A radical solution that could prove beneficial to everyone would be to abolish the income tax entirely and replace it with a consumption tax. A national sales tax of 25% would raise as much money as the current 16,000 page US tax code, with a far higher degree of transparency and vastly easier enforcement.

    You would only pay when you buy something (thereby encouraging productivity and discouraging consumption). The regressive impact could be eliminated by paying every (law abiding) citizen or permanent resident $400/month, thus exempting the first $2000 of monthly income from any tax at all.

    It would be in everyones general interest, an nobodys special interest - so it has zero chance of coming true, but it's nice to dream once in a while.

  • Report this Comment On September 21, 2011, at 10:36 AM, mdk0611 wrote:

    There are 2 basic fallacies involved here:

    1. While some taxpayers like Buffett are out there taxed predominately at the 15% rate for dividends and capital gains, a much larger percentage get significant W-2 income that gets taxed at ordinary rates. The AMT was designed to "get" roughly 150 taxpayers back in 1969 that were essentially an anomale. Does anyone want a repeat of what that morphed into?

    2. These tax proposals mainly kick in a $200k of income for singles and $250k for joint filers. To classify them as "megarich" in an attempt to mask the real target of these tax increases is a flat out lie.

  • Report this Comment On September 21, 2011, at 11:57 AM, fowlermike wrote:

    I find Warren Buffett's stance on this tax issue very interesting...if i understand properly, Mr. Buffett is one of the lowest paid executives in the business - I believe a $100,000 per year which causes his tax rate (combined with the millions of dividends and capital gains he surely receives) relatively low. Since capital gains and dividends are not considered "earned income" Mr. Buffett only pays SSAN and medicare on earned income which means he is contributing much less to SSAN and medicare - he would pay considerably more to these programs and would pay a higher tax rate if he took a greater salary which I doubt few investors would argue to be unfair. In addition I understand Mr. Buffett has donated a great deal of his wealth to the Bill Gates Foundation rather than to "Uncle Sam's" wasteful foundation which tells me he has little faith in our government being good stewards of his tax dollars. Many wealthy individuals set up these trusts for obvious tax advantageous reasons not to mention they don't trust the government to do a good job as noted above. When I believe that politicians are being better stewards of my tax dollars then I might be more inclined to go along with higher taxes - it's the insanity of wasteful spending that is driving the train - fix that before we tax people more....add up excise taxes, sales taxes (city, country and state), property taxes, SSAN, medicare and federal income taxes and you find that everyone's taxes are extremely high. A Fair or Flat Tax is needed so that everyone pays something - even the crooks!!!

  • Report this Comment On September 21, 2011, at 1:56 PM, financeguy85 wrote:

    Republicans love to spout the same one-liners in response to Buffett's thoughts on taxing the wealthy. First is the one that "half the country pays no income tax."

    WRONG. They pay payroll tax. And if you're so upset that they don't pay as much as the wealthy, maybe that's because their average salary is LESS THAN 20,000 PER YEAR.

    Keep up your reverse Robin Hood methodology. There's a special corner of hell waiting for each one of you.

  • Report this Comment On September 21, 2011, at 3:10 PM, mdk0611 wrote:

    For many of those making less than a $20,000 salary (virtually anyone with a dependant) the EITC will offset, or more than offset, any payroll tax they pay.

    The reverse Robin Hood you allege is a myth.

  • Report this Comment On September 21, 2011, at 6:05 PM, financeguy85 wrote:

    You think it's a myth?

    How many times have Republican presidential candidates talked about "broadening the tax base"? Romney, Perry, Bachman, they've all used the phrase. What they clearly mean is that they want to keep the Bush tax cuts in place, and instead place further burden on those who can least afford it.

    The wealth gap is widening at a sickening pace. So you're right, let's widen it further. Let's destroy Social Security and Medicare for working middle-class people (what's left of it, anyway). The poor, the elderly, the sick, let's just let them all suffer even more until they're all dead or homeless.

    That way, the wealthy won't have to pay a dime more. America will be a nation full of small gated communities, and the rest of the country will look like a third-world country. This is already happening. Is that a society you want to live in? The irony is the further crumbling of this country would hurt the wealthy far more than the tax increases people like you despise.

    I cannot understand the selfishness of the Republican party. How in the hell do you look yourself in the mirror.

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