Image Source: The Motley Fool.
It's no big secret that billionaire investor Warren Buffett is a Hillary Clinton supporter. He even recorded a video message to make his case for supporting the former Secretary of State for the presidency. Among other things, Warren Buffett doesn't feel that the wealthiest Americans (himself included) are paying enough taxes, and here's how he and the democratic nominee hope to fix it.
The Buffett Rule
In a nutshell, the Buffett Rule is the idea that no household with income over $1 million per year should pay a smaller effective tax rate than middle-class families. This has evolved to mean that no million-dollar earners should pay less than 30% of their income to taxes. President Obama has actually called for this several times, as well.
Why is the Buffett rule necessary?
Warren Buffett has famously said that he pays a lower effective tax rate than his secretary, and that this is a glaring example of what's wrong with the American tax system. And such a low tax rate isn't unique to Buffett. According to a 2012 White House report, these are some of the reasons why the Buffett rule is badly needed:
- The 400 richest American households paid less than 23% of their income in taxes in 2013. This has gone up considerably under the Obama administration -- it was 18% in the 2008 tax year.
- Incomes of the richest Americans have quadrupled since 1979, while middle-class incomes have risen by just 40%.
- In 2009, 1,470 households that made more than $1,000,000 paid absolutely no federal income taxes whatsoever.
- About one-fourth of millionaires pay a lower tax rate than the average middle-income taxpayer.
How Clinton would implement the Buffett rule
Hillary Clinton's tax plan actually goes beyond the Buffett rule when it comes to taxing the rich. In a statement in response to the average tax rate paid by the wealthiest U.S. households, Clinton said, "As president, I'll do what it takes to make sure the super-wealthy are truly paying their fair share."
According to Clinton's campaign website, her tax plan would make the following changes to ensure the wealthy cannot avoid paying the taxes they owe:
- Formal implementation of the Buffett rule, setting a 30% floor on the effective tax rate paid by million-dollar income households. This would be a set-in-stone rule to ensure fairness.
- A multi-millionaire "Fair Share Surcharge." This 4% additional tax would apply to taxpayers making more than $5 million per year. This would only affect the top 0.02% of taxpayers.
- Closing tax loopholes, such as the Bermuda reinsurance loophole and the Romney loophole, which would subject more income to tax. Without getting into a long explanation, these loopholes allow the wealthy to exploit the tax code to shelter large amounts of income from taxation.
- Increase taxes on capital gains, particularly on investments held for just a few years. For high earners, this would impose a capital gains tax rate of 47.4% on investments held for less than two years (including the net investment income tax and the Fair Share Surcharge discussed earlier), and would gradually decrease for investments held longer. In order to be eligible for the lowest rate (20% before surtaxes), investments would need to be held for longer than six years. This is designed to reward long-term investors and treat short-term profits more like ordinary income.
How would Donald Trump ensure tax fairness?
Donald Trump's tax plan is very different than Clinton's. Instead of raising taxes on the rich, Trump's plan aims to reduce taxes on everybody, with a particular emphasis on the lower-income brackets. While he has proposed closing some loopholes, his basic philosophy on taxation is different.
Hillary Clinton believes that, by taxing the rich and investing that money in America, it can create significant job and wage growth. Donald Trump believes that, if you put more money in the pockets of businesses and wealthy investors, job growth will come naturally and be more sustainable.
Who's right? That's up to you to decide.
