Journalism in the Public Interest

Key Context on Obama’s Vague Proposed Millionaires’ Tax


Getty Images file photo (YOSHIKAZU TSUNO/AFP/Getty Images)

This morning, as part of his broader deficit reduction plan, President Obama called for a new rule that would raise taxes on the the wealthiest Americans. The proposal was quick to spark reaction from Republicans, who labeled it “class warfare.”

But politics aside, we thought it would be helpful to run through what’s actually known about the proposal, the impact it might have on the deficit, and the history behind it all. 

So what, exactly, is the plan?

President Obama’s plan would require households making more than $1 million annually—and the president is one of them—to pay a certain minimum percentage in taxes that matches the rate at which middle-class households are taxed. (Think of it as a simpler version of the overly complicated alternative minimum tax, which was enacted to ensure that even with their many deductions, rich taxpayers still paid a minimum percentage in income taxes.)

Are there any more details?

Nope. The White House has left it quite vague. In fact, it’s unclear how serious the proposal is at this stage.

The president hasn’t yet specified at what rate the millionaires should be taxed. And as the New York Times puts it, administration officials have said that the plan is more of a guiding principle for negotiations. Indeed, they haven’t included its potential revenue in the president’s larger plan to trim $3 trillion from the deficit.

Here’s the White House’s own description of what it’s calling the “the Buffet Rule” [PDF]:

The plan calls for the Congress to undertake comprehensive tax reform that lowers tax rates, closes loopholes, boosts job creation here at home, cuts the deficit by $1.5 trillion, and observes the Buffett Rule—that people making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay.

Of course, however vague the plan, it plays to the preferences of voters—the majority of whom support raising taxes on wealthy Americans in order to reduce the deficit, according to recent polls.

Why is it called the Buffett rule?

Warren Buffet, an investor and America's second wealthiest person, has repeatedly argued that it’s wrong that he and his other “mega-rich” friends are taxed at a lower rate than middle-class  taxpayers—including the secretaries and receptionists who work for them.

In a New York Times op-ed this spring, Buffett wrote that his tax burden is only 17.4 percent, while workers in his office paid double that (presumably including Social Security and Medicare taxes). He advocated increasing the tax rates for anyone with an income higher than $1 million, and increasing the tax rates even more for those who make more than $10 million a year.

Buffett has been making this argument for years, and in 2007, Greg Mankiw, the former chairman of George W. Bush’s Council of Economic Advisers, argued that his numbers were misleading. Buffett’s tax burden was proportionally low not because of tax rates, but because he was clever enough to keep his taxable income low, Mankiw suggested. He also said Buffett’s calculations don’t apply to millionaires who make most of their income through their actual salaries, which would be taxed at rates approaching 35 percent.

Other critics have said Buffett’s proposal amounts to class warfare—essentially, ganging up on the rich and successful. To that argument, Buffett responded in a 2006 interview: “There’s class warfare, all right. But it’s my class, the rich class, that’s making war, and we’re winning.”

What’s the rationale behind the proposal to tax millionaires?

Obama’s proposal is designed to focus attention on America’s rising income gap and increase the “progressivity of the tax code” to balance it out.

Tax rates for the richest Americans today are at or near the lowest they have been for most of the last 50 years.

On the whole, the wealthiest Americans now pay a smaller percentage of their income as taxes than the average taxpayer. According to the Wall Street Journal:

The average tax rate for the top 400 earners in the U.S. fell to as low as 16.62% in 2007 from a recent peak of 29.9% in 1995. It ticked up again in 2008 to 18.11%, according to the latest annual Internal Revenue Service analysis of returns.

Why do the rich pay a lower percentage than other people?

A huge component of this is the capital gains tax, which investors have to pay on the profits they make from selling stocks, bonds or real estate. For long-term investments, that tax rate is capped at 15 percent—much lower than the rate at which wages and salaries are taxed for most people.

The Washington Post recently wrote a great piece that explains how the tax on capital gains primarily benefits the wealthy, who earn a far larger slice of their income via stocks and bonds than do middle-class Americans:  

Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to 5 percent of the people; about half of all the capital gains have gone to the wealthiest 0.1 percent.

Have the capital gains taxes always been so low?

No. In 1986, the the Tax Reform Act backed by President Reagan and key congressional Democrats eliminated the special treatment for capital gains and dividends by bringing the peak tax rates for salaries and investments to the same level—28 percent.

But as the Post details, under the Clinton and George W. Bush administrations, the capital gains tax rate was bumped down to a historic low—thanks in large part to Fed Chairman Alan Greenspan, who advocated getting rid of the tax.

Are there any proposals to change the capital gains tax?

Yes. At least five GOP presidential candidates have said they support eliminating it although doing so would almost certainly increase the deficit. They argue that eliminating it would spur investment and economic growth.

Meanwhile, President Obama’s bipartisan fiscal commission proposed raising the capital gains tax to match the tax rate for ordinary income. According to economist Leonard Burman at Syracuse University’s Center for Policy Research, it’s not clear that the current historically low capital gains tax has had any effect on economic growth.

How much money would these millionaire taxes raise, and what impact, if any, would it have on reducing the deficit?  

It’s hard to know until the actual tax rate is decided, but the Wall Street Journal has described the proposal: "unlikely to have much practical impact on federal deficits anytime soon.”

Ezra Klein’s WonkBlog reviewed a few past proposals that involve higher taxes on millionaires, and they were all over the map, both in terms of total dollars and years measured. One would raise a modest $10 billion over three years, while two others would raise $500 billion or nearly $1 trillion over 10 years respectively. 

It’s actually more efficient (from a revenue generation perspective) to simply tax capital gains at the same rate as ordinary income. Here are charts on long-term trends for both income & capital gains tax rates:

Slight correction: Buffett’s op-ed was published in August (not the spring).


Rather than “taxing the rich,” let’s point out the obvious:  While Buffet only pays 17% in taxes, his tax rate is 35%.  Maybe the right solution is to scrap the 7,500 pages (3.5 million words) of tax code in favor of “here are your rates, X% of charitable donations and pre-tax spending offset your income” would solve the problem faster.

Because guess what:  Those extra pages ain’t there to make your life or mine any easier, they’re there to decrease the taxes Warren Buffet (and GE, Microsoft, and so forth) pay.  Every page eliminated is money in the treasury, as any accountant (or a look at any random page) will tell you.

But I guess if you do that, accountants and tax lawyers wouldn’t get such brisk business for saving we rank and file from getting crushed by our miscalculated burdens…

The rich dont pay a lower percent than other people, but thank you for uncritically regurgitation the latest talking point from the White House.

“Middle-class families shouldn’t pay higher taxes than millionaires and billionaires,” Obama said Monday. “That’s pretty straightforward. It’s hard to argue against that.”

The data tell a different story. On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

There may be individual millionaires who pay taxes at rates lower than middle-income workers. In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the Internal Revenue Service. That, however, was less than 1 percent of the nearly 237,000 returns with incomes above $1 million.

Tax wealth not income.

To Mike H.

There is an inflection point at which the rich do pay less in tax then the middle and upper middle tax. Once you achieve a certain level of wealth, ever increasing portions of income are from long-term capital gains and qualified dividends which are taxed at a much lower rate than the middle class. This effect is hugely amplified by those who manage private equity, hedge funds and venture capital where actual compensation in the form of “bonuses” from the carried interest are taxed as long-term capital gains.

Mike is once again playing into the game of total paid vs. percentage paid. Anyone making more than $1mm in gross income paying less than say 25% in tax should be embarrassed.


One of the things that are consistently missing in these type of discussions is that were talking about taxable income ... not gross income. For the wealthy this means a lot more than just the standard deduction & exemptions. High income people benefit from statutory tax exemptions like state & local bond interest, and all the other write offs for business, investment, & personal expenses before you even get to taxable income.

“’s not clear that the current historically low capital gains tax has had any effect on economic growth.”

I suggest that after 10 - 11 years, it is VERY clear that the nice low taxes for the wealthy have not produced one single job or stimulated economic growth. Indeed, the very opposite is the result.

Except for the people in China.

Frank, to go a step further, most people with any income structure their money so that they don’t have a huge income, themselves.  Instead, it’s distributed through trusts, shell corporations, and charities.

Anyone with a couple hundred dollars to burn to pay for the discussion, sit down with your favorite neighborhood accountant (the rich guy, not the dork who does your taxes for a free pizza) and ask him about asset protection, and you’ll see how easy it is.  None of the money is hidden, but it’s no longer “yours” to tax.  (I decided not to do it, because it strikes me as unethical, but the meeting was well worth the money.)

so much for non bias jounalism. Lord I sometimes forget Propublica talks the talk of non bias, but does not walk the walk. guess it is time to find a news source, this one has failed us independents. Shame on you, shame on you. you are now Fox, cnn, msnbc all wraped up in one bias pile of crap. Nice try though, and way to spin this story. Jerks.

Buffet’s money that he pays 17% on has already been taxed once and probably at a higher rate. Also its a complete fallacy to say that people earning 50to 75,000 pay anything near the 17% rate—nonsense-b.s. etc—people earning 1mm pay about 30% on average—this approach is nothing more than a campaign talking point—- wake up out there!!!!

And most important its a distraction from our severe spending problem— lets attack spending—- why is it so difficult to roll back gov spending excluding entitlements and military to 2008 levels—I’ll answer—- obama and the progressives love the bloated beaurocracy and new army of regulators— its math—roll back spending—- then roll back regulations and keep taxes,regulation certain for 10 years and then duck—- economy and biz/job creation will explode at the expense of non-productive government jobs

Matt Tea,

The whole point of the Buffett tax is that those making more than $1mm and who are paying little tax due to the structure of their deductions and the tax code (principally carried interest, capital gains and qualified dividends) will have to pay tax at a more suitable rate. This approach would have no impact on the typical millionaire paying 30%. Caught out are the hedge funders, private equity managers and venture capitalists who losed their carried interest (separate loophole from the millionaire issue) and those with extreme wealth where most of their income comes from financial assets which have attached to them advantaged treatment under the tax code. And do realize just how much wealth we are talking about. In the current environment, it would take tens of millions of dollars in wealth to generate that much financial income.

Matt, I think all rational people believe that spending cuts must form part of our effort to reduce the deficit, but not at the exclusion of looking at the equity of our tax code and recognising that our government’s actions in the past three years have done more to support the richest members of society. That is exactly the point Buffett was making.


Let’s come up with some word other than “millionaire” for these folks. A millionaire is someone who has a million dollars in assets, I believe, not a person who makes that much in a year.

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