President Obama today endorsed a “Buffett Rule” for tax policy:

“Any reform should follow another simple principle:  Middle-class families shouldn’t pay higher taxes than millionaires and billionaires.  That’s pretty straightforward.  It’s hard to argue against that.  Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett.  There is no justification for it.”

Obama is arguing for another “alternative minimum tax (AMT).”  In this case, the “Buffett Rule” seems to imply that high income households should pay taxes (even on capital gains) at about a 25 percent rate, no matter what.  That is the marginal tax rate for most middle-income families.

This was the same justification for the AMT back in 1969.  Incensed that about 100 high-income taxpayers owed nothing in federal income tax, the alternative minimum tax (AMT) was created to make sure that these people paid at least a little.  The AMT is a parallel income tax system that forces people to calculate their taxes twice and pay the higher amount.

Since 1969, the AMT has exploded.  The number of AMT taxpayers today is not 100, but 4 million.  Without a “patch” which is annually-renewed by Congress, the number of AMT taxpayers would be more like 31 million, or 22% of families.

All taxes originally intended for the rich eventually are paid by the poor and middle class.  A good example is the telephone excise tax which was put in place in order to help finance the Spanish-American War of 1898.  Back then, a telephone was a plaything of the rich.  But the tax stuck, and was only (mostly) repealed in 2006—fully 108 years later.

The capital gains tax is already a surtax.  The capital gains tax is a second bite at the tax apple, not a preferential treatment of investment.  First, a taxpayer earns money and pays taxes.  Then, he pays taxes again when his after-tax investment makes a profit.  Put another way, most capital gains are returns to shareholders of after-tax corporate profits—money which has already faced taxation at the corporate level.  Raising the capital gains tax would make this double-tax worse.

The tax code is already steeply-progressive.  The top 1% of taxpayers (those earning more than $400,000) pay 40% of all income taxes.  They pay 28% of all combined federal taxes.  Compare this to the lower half of all income earners, those making less than $33,000.  They pay only 3% of all income taxes, and less than 1% of all combined federal taxes.  The productive class is already paying its fair share.

What do you think?  Is the Buffett Rule the new AMT?

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Posted by Ryan Ellis on Monday, September 19, 2011 5:50 PM EDT

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