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Fiscal Affairs: The Buffett Rule Is a Good Idea

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Some high income Americans pay a lot of tax; others do not. If you have right tax advice and if most of your income can be structured as some form of "capital gains," your marginal rate -- what you pay on the your last dollar of income -- may be very low. The highest marginal income tax rate currently is 35 percent, while long-term (over a year) capital gains are taxed at 15 percent at most.

The Buffett Rule is a proposal to establish a minimum tax rate for "millionaires" -- people earning more than $1 million per year -- and the Senate is likely to vote on a version this week. The exact amount of revenue that this would bring in depends on the details, but there is no question that it is small relative to the country's need to control the federal budget. (The Joint Committee on Taxation scored one version of this proposal as generating about $30 billion over 10 years; the annual budget deficit will remain over $1 trillion in the near term even under the most optimistic projections.)

The biggest sticking point for any reasonable strategy to control the U.S. federal budget is that one side -- the Republicans -- steadfastly refuse to raise taxes, at all and on anyone.

There are three ways forward. Either the Republicans begin to compromise -- and agree to raise taxes as part of a comprehensive deficit reduction and debt control strategy, just as Ronald Reagan did. There is a great deal of confusion about whether Reagan raised taxes after first cutting them; see chapter 3 of White House Burning for the details of what actually happened.

Or the Republicans who have signed the Taxpayer Protection Pledge will prevail -- no one's taxes will go up and, most likely, some people's taxes will go down. In this case, either the deficit will continue to grow (which is what Newt Gingrich is proposing) or Medicare and almost everything else the federal government does will be scrapped (which is the position represented by Paul Ryan). My guess is that, in this scenario, we will say farewell to any meaningful form of social insurance -- good luck getting healthcare when you are 85 (unless you earned over a million dollars a year for many years).

Or the Republicans will lose big -- and fiscal consolidation can proceed without them.

A complete loss of support for the Republicans seems unlikely -- they will surely hold more than 40 seats in the Senate for the foreseeable future.

So the fiscal trajectory of the country -- and whether Social Security and Medicare survive -- depends very much on whether the Republicans will compromise on taxes.

The Buffett Rule is a tiny tax, of little consequence to the people who would pay it or to the country as a whole. The idea that $30 billion of additional revenue would tip the balance in any way is simply ludicrous.

But this is precisely what gives the Buffett Rule its powerful symbolism.

Much of federal government public finance is complex and hard for people to comprehend -- demystifying deficits and debt is a major reason we wrote White House Burning. Some of the reaction to our book is encouraging, particularly from people who are willing to spend some time with the details.

But the question behind the Buffett Rule is crystal clear and does not require you to buy a book or even read the newspaper. Should all high income Americans pay a moderate level of tax?

Simon Johnson is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario.