The “Buffett Tax”: Why 5.6%?

Thursday October 13th, 2011   •   Posted by Craig Eyermann at 9:17am PDT   •  

As things stand today, if the U.S. Congress were to take absolutely no action, the maximum personal income tax rate in the United States will rise to 44.6% in January 2013. The American Enterprise Institute’s Alan Viard explains where that number comes from:

In 2010, the top income tax rate bracket for ordinary income is 35 percent. Besides wages and interest income, this income category includes profits from pass-through business firms�sole proprietorships, partnerships, and S-corporations. Under the president�s proposal, the top bracket will rise to 39.6 percent. A stealth provision that phases out high-income taxpayers� itemized deductions will also be reinstated, adding another 1.2 percentage points to the effective tax rate, bringing it to 40.8 percent. Wages and some of the pass-through income will also remain subject to a 2.9 percent Medicare tax. These 40.8 and 43.7 percent tax rates, which will apply in 2011 and 2012, match the 1994 to 2000 rates�the same top bracket, stealth provision, and Medicare tax were in place then.

But the picture changes in 2013. Under the healthcare law adopted in March, the Medicare tax will rise that year, from 2.9 to 3.8 percent. Also, a new 3.8 percent tax, called the Unearned Income Medicare Contribution (UIMC), will be imposed on high-income taxpayers� interest income and most of their pass-through business income that�s not subject to Medicare tax. So, under the president�s proposal, virtually all of top earners� ordinary income will be taxed at 44.6 percent, starting in 2013.

Uncle Sam Says "Pay Up, Fool!"

Uncle Sam Says "Pay Up, Fool!"

So what would happen to the effective top income tax rate if President Obama’s version of the “Buffett Tax”, which would raise taxes by going after the charitable and mortgage interest tax deductions of households with�incomes in excess of $250,000 or individuals with incomes in excess of $200,000?

That question has become moot because the Senate’s Democratic leadership’s version of the “Buffett Tax” changed the income threshold to $1,000,000, while explicitly increasing the top tax rate�by 5.6% rather than reining in the tax deductions available to high income earners in seeking to gain more popularity for the tax hike measure.� Since both measures were projected to increase the federal government’s total tax collections by approximately the same amount, and because President Obama has endorsed the Senate Democrats’ proposed change in the top tax rate, we can use that newer proposal to determine how the�top tax rate would effectively change under President Obama’s and the Senate Democrats’ current “Buffett Tax” proposal.

As it happens, the top tax rate turns out to cross a pretty significant threshold:

44.6% + 5.6% = 50.2%

We’ll note that until this point, President Obama’s proposed tax hikes have followed a very predictable pattern since he was sworn into office. One that we could predict using just three bits of data:

Using our model back in April 2009 and December 2009, we accurately predicted that President Obama and his supporters in the U.S. Congress would first seek a top income tax rate of 40% (he actually sought 39.6%) and later seek a maximum income tax rate of 44-45% (as we saw earlier, they got 44.6%).

Using data from Tuesday, 11 October 2011, our mathematical model would predict President Obama would be seeking a top income tax rate of 48.0%.

Given how accurate our model has been previously, coming within a half percent of the actual top income tax rate being proposed, it appears that he and the congressional Democrats have broken from the pattern they had previously established, seeking instead to go with a top income tax rate that would be consistent with even higher levels of federal government spending and a national debt even higher than today’s levels. Which means that’s what they really hope to achieve, as opposed to their stated purpose of trying to minimize the U.S. government’s annual budget deficits.

Speaking of which, the non-partisan Tax Foundation ran the numbers for estimating how much extra money the U.S. government might collect via the “Buffett Tax”:

Mr. Buffett specifically called to raise tax rates on Americans making more than $1 million and proposed an additional increase on taxpayers whose income exceeds $10 million.� Suppose Mr. Buffett got his wish and loopholes and deductions were eliminated, making it possible to tax the “super-rich” (those earning $1M – $10M per year) at an effective rate of 50%.� The following table shows the effect that such a historic hike on effective rates would have on the deficit and debt:

Taxing the “Super-Rich” (Annual Income of $1 to $10 Million) at an Effective Rate of 50%

(dollar amounts in $Thousands)

Current Taxes Paid

Taxes Paid at New 50% Rate

Revenue Gained

Reduction of Deficit

Reduction of Debt






So we see that the “Buffett Tax” is not really about reducing the federal government’s annual budget deficit or the United States’ total public debt outstanding in any meaningful way. It is really about being able to spend even more money, which will enable the government to become even larger and more controlling than it is today.

Is that really such a good idea?

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October 2011