The Buffett Rule – Election Year Politics or a Path to Fairness?

Last year in the United States, amidst an indifferent recovery, a politically motivated near-default on its vast debt, and the beginnings of the Occupy Wall Street movement, Warren Buffett wrote an op-ed in The New York Times last August highlighting how he paid a lower effective tax rate than his secretary. Nearly a year later, by virtue of the prevailing political climate, the CEO of Berkshire Hathaway’s proposal to redress this glaring disparity in tax fairness would become the centerpiece of President Obama’s economic policies and part of his campaign message for re-election.

The policy, as advocated for by President Obama over the last few months, is fairly simple in construction; anyone who earns more than $1 million a year must pay an effective tax rate of 30% (equivalent to the marginal tax rate for many middle-income earners), thus negating the chance to employ the litany of loopholes and deductions in the American tax code. It is in this simplicity where the criticism arises; as we note that it was rejected by the Senate earlier in the week, with the Republican minority employing their oft-used tactic of filibustering legislation to avoid debate on the legislation.

I don’t think there’s any doubt that in terms of fairness, the Buffett Rule is sound policy. As the President frequently highlights in his recent public appearances, similar policies have been previously advocated by former Presidents, including the famed Republican tax cutter, Ronald Reagan. President Obama even likes to jab the Republicans further by suggesting that such views from Reagan would make him an untenable candidate in the current Republican Primary.

The problem though, is that the policy has been proposed in isolation by the Obama Administration; clearly to be used a rallying-cry for Democratic voters in the lead-up to the election campaign against Governor Romney. Considering Romney’s vast wealth, and problems in the Republican Primary when it came to releasing his tax returns (when they were finally released, it showed that Romney paid an effective tax rate of 13.9% in 2010), it’s no surprise seeing how aggressively the Obama camp are pushing this measure.

Whether we see a full-throttled class war between the Obama and Romney campaigns over the next few months, it shouldn’t get in the way of implementing significant policy reforms to not just improve income equality but address the shocking budget deficits the US is racking up year after year.

Taking another look at the numbers, the Buffet Rule (at the 30% tax rate) would raise about $47 billion over the next 10 years. However, in that same time, the federal government is projected to spend $45 trillion; primarily on the increasingly expensive Social Security, Medicare and Medicaid programs – by virtue of the aging American population.

So whilst we can commend the President for adopting the ideas of one of his key supporters (Buffett has said he will campaign for the President’s re-election this year, despite recently announcing he is battling stage-one prostate cancer), it is not nearly enough when considered in the context of runaway budget deficits and a tax code riddled with loopholes, exceptions and deductions that are merely used by members of Congress to reward powerful, vested interests.

Whilst members of Obama’s team have said that it’s up to Congress to implement the President’s broad outline for comprehensive tax reform, what is really needed at this time of vicious polarisation is for some meaningful Presidential leadership.

But as the focus of the President’s shifts away from policy and towards the election campaign against Romney, that’s looking increasingly unlikely.

 

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