The "Buffett" Rule

Warren Buffett, the billionaire magnate, investor and philanthropist, has been getting a lot of face time in the news these past couple years. He made waves all across the media with his assertion, in a New York Times op-ed, that the super-rich in America were getting “coddled” and should be expected to pay more in taxes. Famously claiming that he wanted to pay more in taxes, Buffett has been a strong adversary to the Bush-era tax breaks for rich people and corporations, calling for higher rates on investments.

President Barack Obama's 2013 budget proposal will pay tribute to Buffett with something called the “Buffett” rule, which will replace the alternative minimum tax that was originally established for the purpose of limiting the deductions rich taxpayers could use to reduce their taxable income. The rule calls for a tax increase of $1.5 trillion over the next decade (around $36.7 billion a year) in a plan that will effectively end the Bush era tax cuts and mandate anyone earning more than $1 million a year to pay 30% in income taxes.

In what will almost assuredly result in a fiery election year showdown with Republicans, Obama's proposal specifically calls for a reduction in tax breaks to the wealthiest Americans and U.S.-based multinational corporations. In his budget message, Obama said that Americans earning “$50,000 a year should not pay taxes at a higher rate than somebody making $50 million.”

Opponents of the plan say it will cause investors to dial down their spending, which will effectively stifle innovation and business growth. Most of these critics want deficit reduction to come from a reduction in funding for “entitlement” programs like Medicare, Medicaid and Social Security. The major points of contention revolve around the marginal tax rate, or tax bracket, which affects how much someone will be paying in taxes after deductions and credits.

Theoretically, an investor such as Warren Buffet is currently protected from a top 35% rate by the accumulation of capital gains, dividends, and other forms of interest enjoyed by hedge fund managers. This “carried interest,” as it is called, essentially amounts to untaxed investment funds paid to managers by private equity. This is also known as a “performance fee,” from which most wealthy investors receive a great deal of their annual income. Fiscal conservatives don't consider performance fees to be entitlements.

We can expect a mighty congressional showdown later this year over the “Buffett” rule. In the meantime, we'll be treated to more rhetoric and number-crunching by politicos attempting to wrangle the facts of the tax code to fit their ideologies.