A Further Perspective

Robin Hood Had It Easy

The Buffett Rule, when seen through a tax lens, has nothing to do with "fairness."

By 4.17.12

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After listening to Obama's Buffett Rule, you realize Robin Hood had it easy. Achieving "fairness" is much easier done with bows and arrows than rationalizing and legislating. It is simplicity itself to take an arrow from quiver to bow, but complexity itself to take "fairness" and legislate it into the tax code. 

Speaking last week, Obama explained his Buffett Rule's origin: "You've heard that my friend Warren Buffett pays a lower tax rate than his secretary…" In this year's State of the Union address, he explained the Rule's meaning: "Tax reform should follow the Buffett Rule. If you make more than $1 million a year, you should not pay less than 30 percent in taxes."

Seems simple enough…until you try to put it into the tax code. Then questions quickly appear.

For one thing: How much do secretaries make? This is a pretty important point because the whole concern apparently arises from Warren Buffett paying a lower tax rate than his secretary. According to last year's analysis by the Bureau of Labor Statistics, the annual mean wage for "executive secretaries and executive assistants" -- and we can presume that Buffet's secretary falls in that group (more on that point below) -- is $48,120. Not bad, not enough to buy a single share of Buffett's Berkshire Hathaway stock, but not bad.

So, we can presume from the 30 percent "fairness" standard that this person is paying just below a 30 percent rate? According to Congress's official tax estimator, the Joint Committee on Taxation, an individual making BLS's annual mean wage for executive secretaries pays a 10 percent income tax rate on her first $8,700, then a 15 percent rate up to $35,350 and then 25 percent up to the $48,120. 

Those percentages are well less than the 30 percent "fairness" threshold laid out under the Buffett Rule. What gives?

Well, perhaps Buffett's secretary is paid a tad more than just the mean annual wage. How much would she have to be paid to fall just below the 30 percent "fairness" level -- i.e., the 28 percent rate bracket? Again according to Congress' JCT, an individual earner does not reach the 30 percent tax bracket this year until she earns over $178,650. Wow. 

That is a pretty good salary to say the least -- there's nothing "mean" about it. You have to be pretty handy around the office to make that kind of money. Lots of folks would like to have their handiness so well compensated. In fact, if you're a secretary making less than this, you should really consider moving to Omaha. Apparently there is a serious shortage of secretarial help in Nebraska. 

Another point is that someone making this amount does not simply "pay less than 30 percent in taxes." They pay a lot less. According to the JCT, she pays an average income tax rate of 10.9 percent. That's right, 10.9 percent. The reason is because of the stair-step nature of the tax code's marginal rates (whereby income is taxed first at lower rates) and numerous items in the tax code that reduce the effective tax rate -- the real key to taxes' impact on an individual.

If the focus were on the real economic impact to such below-30 percent-taxpayers, then the Buffett Rule's quest for "fairness" could simply accept the current capital gains top tax rate of 15 percent, which is still significantly higher than this group's 10.9 percent average effective tax rate. Of course, that would be plenty awkward to have to admit. 

The awkwardness does not stop there though. How do you ensure that someone "not pay less than 30 percent in taxes"? Because the lower tax brackets reduce the overall effective rate that a person pays, even if there were no special tax-reducing items in the tax code, a person is going to pay less than their top statutory rate. In other words, even if you tax everything they make over $1 million at the 30 percent rate, they will still pay less than a 30 percent rate on their total earnings. So do you actually need a rate higher than 30 percent to achieve "fairness"? 

And finally ponder this: We have been here before. It's called the alternative minimum tax, or the AMT -- and its top rate is 28 percent. Originally designed in the 1980s to achieve the "fairness" now sought, it missed badly and instead would sweep tens of millions of middle class taxpayers into its net. That is it would if Congress did not "patch" the AMT every year so that the unintended middle class are not caught by it. But even with that fix, it apparently didn't achieve its "fairness" goal in regards to top earners either, or else we would not now need to look at what would effectively be a second alternative minimum tax. 

Yes, Robin Hood had it easy -- no wonder his associates were called "Merry Men." Taking "fairness" from Sherwood Forest to the U.S. tax code is a long and arduous trip indeed.

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About the Author

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.