Buffett Rule

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 got its name from billionaire investor Warren Buffett who famously stated that it was wrong that he pays a lower tax rate than his secretary.

Understanding the Buffett Rule

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 middle-class shoulder this burden because their income primarily consists of wages subjected to income, payroll, and other federal taxes whereas upper-class income consists primarily of investment income taxed at preferential capital gains rates. It 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 Buffett Rule inspired legislation known as the "Paying a Fair Share Act.” This legislation was first introduced and rejected by Congress in 2012. Similar legislation was introduced and rejected in subsequent years, as well.

Critics state that the Buffett Rule is, in effect, a capital gains tax rate hike that would have a chilling effect on business growth. Proponents of the Buffett Rule claim it is the first step to close a tax loophole with a measure of tax impartiality. They remind critics that tax code bias helps the very wealthy avoid taxes so that 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.