Skip to main content

The Buffett Rule is going nowhere

By Edward J. McCaffery, Special to CNN
updated 2:47 PM EDT, Mon April 16, 2012
 Warren Buffett, head of Berkshire Hathaway, wouldn't really be affected by the
Warren Buffett, head of Berkshire Hathaway, wouldn't really be affected by the "Buffett Rule," says Edward J. McCaffery.
STORY HIGHLIGHTS
  • The Buffett Rule is designed to make sure those who make over $1 million pay more tax
  • Edward McCaffery: The idea has three fatal flaws
  • He says that even if it's enacted, it wouldn't really affect namesake Warren Buffett
  • McCaffery: Real reform can be achieved with a progressive consumption tax

Editor's note: Edward J. McCaffery is Robert C. Packard Trustee Chair in law and professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler."

(CNN) -- April, the cruelest month: Time for tax deadlines and tax policy follies. Hence, the resurrection of the so-called Buffett Rule.

Named after Warren Buffett, who said it was an outrage that he pays a lower tax rate than his secretary, the proposal is designed to ensure that the really rich -- those with annual reported taxable incomes of more than $1 million -- pay an "effective tax rate" of 30%.

The idea is another attempt by President Barack Obama to restore some measure of progressivity to the tax code. Baffled and blocked by the mythical Joe the Plumber, Obama has been unable to restore the top marginal tax rate on those reporting more than $250,000 a year to their pre-George Bush levels, a top rate of 39.6% from its current 35%. That seemingly modest proposal was a centerpiece of Obama's landslide 2008 election campaign. It has gone nowhere. Neither will the Buffett Rule. Why? Because the idea has three fatal flaws.

Edward J. McCaffery
Edward J. McCaffery

1. The Buffett Rule is moot.

It's dead on arrival. The rule has no chance of getting through the House, even it can get through the Senate. And if history is any guide, any form of tax increase, on anyone, will not bring votes to any person or party in November, so there are no political points to score here. Ask Joe the Plumber. The practical political fact sits alongside some pressing fiscal facts: America is running massive deficits. Our spending is too high. Our revenues are too low. We are a Greece waiting to happen. Meanwhile, inequality of all forms is getting worse. We need to do something, not nothing. Empty April symbolism is nothing.

Explain it to me: The 'Buffett Rule'

2. The Buffett Rule won't help solve the real problems.

It won't help the fiscal problem because it is a drop in the bucket. The most optimistic projections are that the rule might raise $50 billion a year. That's unlikely, because people plan around tax increases, but even if we get it, it is about 3% of the projected $1.5 trillion deficit. The rule could only be meaningful if it were some kind of first step. But first step toward what?

History shows that marginal tax rates were raised on the very highest bracket to 94% in the midst of World War II. History also shows that almost no one paid tax in this bracket. Why do it then? Because a top rate of 94% made lower rates of 50% and 70% look more palatable. Is the Buffett Rule a first step toward lowering the 30% flat rate to those making more than $250,000, or raising other middle-class taxes? It is hard to see anything very good happening here.

3. The Buffett Rule, even if enacted, won't work because it won't really affect Warren Buffett!

The really, really rich in America don't pay high taxes because they don't report high incomes. And they don't report high incomes for perfectly legal reasons. As I have been writing for decades now, the really, really rich, including Robert Kiyosaki's "Rich Dad," follow the three simple steps of Tax Planning 101: Buy, borrow and die.

By buying assets that rise in value without producing cash, the really, really rich benefit from "unrealized appreciation" that need not go down on any tax form. This is key to the business and investment strategy of Buffett's Berkshire Hathaway. When the really, really rich want to consume, they borrow, also tax-free under the income tax. To cash it all out, the really, really rich die, like we all do -- and then the so-called stepped-up basis on death means that their heirs can sell off assets and pay off debts, tax-free.

We can and should attack Tax Planning 101 and make the really, really rich pay some tax. We should address the tax benefits of unrealized appreciation and, even more so, of borrowing.

We can do so, surprisingly simply, by a progressive consumption tax, as I and others, like Robert Frank and Greg Mankiw, have advocated for years. That's real reform that would really affect Warren Buffett. As such, I suppose it must wait until April passes.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Edward J. McCaffery.

ADVERTISEMENT
Part of complete coverage on
updated 9:42 PM EST, Fri December 19, 2014
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
updated 8:12 PM EST, Fri December 19, 2014
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
updated 12:09 PM EST, Fri December 19, 2014
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
updated 6:45 PM EST, Thu December 18, 2014
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
updated 4:34 PM EST, Fri December 19, 2014
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
updated 2:51 PM EST, Thu December 18, 2014
Jeff Yang says the film industry's surrender will have lasting implications.
updated 4:13 PM EST, Thu December 18, 2014
Newt Gingrich: No one should underestimate the historic importance of the collapse of American defenses in the Sony Pictures attack.
updated 7:55 AM EST, Wed December 10, 2014
Dean Obeidallah asks how the genuine Stephen Colbert will do, compared to "Stephen Colbert"
updated 12:34 PM EST, Thu December 18, 2014
Some GOP politicians want drug tests for welfare recipients; Eric Liu says bailed-out execs should get equal treatment
updated 8:42 AM EST, Thu December 18, 2014
Louis Perez: Obama introduced a long-absent element of lucidity into U.S. policy on Cuba.
updated 12:40 PM EST, Tue December 16, 2014
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
updated 11:00 AM EST, Wed December 17, 2014
The Internet is an online extension of our own neighborhoods. It's time for us to take their protection just as seriously, says Arun Vishwanath.
updated 4:54 PM EST, Tue December 16, 2014
Gayle Lemmon says we must speak out for the right of children to education -- and peace
updated 5:23 AM EST, Wed December 17, 2014
Russia's economic woes just seem to be getting worse. How will President Vladimir Putin respond? Frida Ghitis gives her take.
updated 1:39 AM EST, Wed December 17, 2014
Australia has generally seen itself as detached from the threat of terrorism. The hostage incident this week may change that, writes Max Barry.
updated 3:20 PM EST, Fri December 12, 2014
Thomas Maier says the trove of letters the Kennedy family has tried to guard from public view gives insight into the Kennedy legacy and the history of era.
updated 9:56 AM EST, Mon December 15, 2014
Will Congress reform the CIA? It's probably best not to expect much from Washington. This is not the 1970s, and the chances for substantive reform are not good.
updated 4:01 PM EST, Mon December 15, 2014
From superstorms to droughts, not a week goes by without a major disruption somewhere in the U.S. But with the right planning, natural disasters don't have to be devastating.
updated 9:53 AM EST, Mon December 15, 2014
Would you rather be sexy or smart? Carol Costello says she hates this dumb question.
updated 5:53 PM EST, Sun December 14, 2014
A story about Pope Francis allegedly saying animals can go to heaven went viral late last week. The problem is that it wasn't true. Heidi Schlumpf looks at the discussion.
updated 10:50 AM EST, Sun December 14, 2014
Democratic leaders should wake up to the reality that the party's path to electoral power runs through the streets, where part of the party's base has been marching for months, says Errol Louis
updated 4:23 PM EST, Sat December 13, 2014
David Gergen: John Brennan deserves a national salute for his efforts to put the report about the CIA in perspective
updated 9:26 AM EST, Fri December 12, 2014
Anwar Sanders says that in some ways, cops and protesters are on the same side
updated 9:39 AM EST, Thu December 11, 2014
A view by Samir Naji, a Yemeni who was accused of serving in Osama bin Laden's security detail and imprisoned for nearly 13 years without charge in Guantanamo Bay
updated 12:38 PM EST, Sun December 14, 2014
S.E. Cupp asks: How much reality do you really want in your escapist TV fare?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT