Warren Buffett wrote a great New York Times op-ed in which he illustrated the ridiculousness of the claims that higher tax rates on the rich will cause them to forego profitable investments. As he points out, the decline of tax rates on the rich over the last few decades have only served to further fuel their skyrocketing incomes at the expense—rather than to the benefit—of everyone else.
Making the highest income households pay a fair share of taxes is important for the principles of fairness itself: the concept of vertical equity stipulates that tax burdens should be proportionate to a taxpayer’s ability to pay, so as income rises, so too does the share of income paid in taxes (and thus effective tax rates). As my colleague Andrew Fieldhouse calculates, very high-income households start to see their effective individual income tax rate start to fall, as the preferential treatment of capital gains and dividends undermine the basic tenant of our progressive income tax that effective tax rates should rise with income. This implies the burden of taxation is being shifted from those best able to pay to those more burdened by higher effective taxation.
But it’s not just about fairness—raising taxes on the rich produces a lot of revenue, which we can then use to create jobs and boost the foundational strength of the economy over the long run though public investments in infrastructure, education and research and development. In a report released Monday, I calculated that instituting the Buffett Rule—specifically, the Paying a Fair Share Act of 2012, which would create a minimum tax rate for taxpayers with incomes more than $1 million—and using the money to finance productive investments in the nation’s infrastructure would, on net, create roughly 43,000 jobs in 2013 and nearly 100,000 each year thereafter. The report also includes job impacts broken out by state.
Of all the tax and budget changes Congress could implement, tax increases on the very highest-income households have the least adverse impact on near-term economic recovery. Conversely, government spending increases—particularly on infrastructure and income supports, such as unemployment insurance—rank among the most cost-effective policies for boosting demand. Consequently, coupling cost-effective job creation measures with progressive revenue increases is a no-brainer for financing job creation if policymakers are not willing to simply prioritize deficit-financed job creation. This is an approach EPI routinely advocates, most recently in our briefing paper Navigating the fiscal obstacle course: Supporting job creation with savings from ending the upper-income Bush-era tax cuts.
One interesting point to note is that the Buffett Rule is needed largely because of the preferential tax rates on capital gains and dividends, currently at a top rate of 15 percent compared to a 35 percent top rate on wages and salaries. In our recently released budget blueprint Investing in America’s Economy, we raised capital gains and dividends tax rates up to 36 percent and eliminated some loopholes like step-up basis that would otherwise allow wealthy capital owners to transfer their gains to their children tax-free. Taking on the preferential rate on capital gains and dividends in this manner raises far more money—generating $500 billion, three times as much revenue as from the Buffett Rule—and essentially accomplishing the same goal but with far more simplicity.
Nonetheless, the approaches are complementary. Even if the current tax code did not exhibit the kinds of special breaks and preferences that allow Warren Buffett to pay a lower tax rate than his secretary, a Buffett Rule would still be an important tax provision because while it wouldn’t raise much money, it would make it more difficult for future Congresses to reinsert tax breaks for the rich. Given that it seems unlikely that the power that the wealthy have over Congress will be fading anytime soon, this redundant ”safety valve” approach is vital to ensure a fair tax code now and in the future.