One idea that President Obama introduced on Monday in his $3 trillion deficit reduction plan is what he's calling the "Buffett rule." It's named after Warren Buffett, the billionaire investor and chief executive officer of Berkshire Hathaway who has been quite vocal in arguing that the rich should be taxed more.
"Middle class families shouldn't pay higher taxes than millionaires and billionaires; that's pretty straightforward," Obama said. "It's hard to argue against that. Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett."
On Aug. 14, The New York Times ran an op-ed from Buffett with the headline Stop Coddling the Super-Rich, in which Buffett said he was taxed at a lower rate than his non-billionaire staff. The column caught fire on the Internet, but this argument wasn't a new one from the Oracle of Omaha. In 2007, he sat down with Tom Brokaw for a segment that aired on the NBC Nightly News.
"My total taxes paid — payroll taxes plus income tax — mine came to 17.7 percent. The average for the office was 32.9 percent," Buffett said in that interview. "There wasn't anybody in the office, from the receptionist on up, that paid as low a tax rate. And I have no tax planning: I don't have an accountant, I don't have tax shelters. I just follow what the U.S. Congress tells me to do."
'A Very Appealing Target'
The president didn't offer specifics about the Buffett rule, and neither did Treasury Secretary Timothy Geithner when he was asked at a White House press briefing how it would work.
"Americans who are fortunate to make over a million dollars should, as a share of their income, pay a minimum level that is no lower than that paid by an average middle class family. [There are] lots of different ways to do that," Geithner said.
So how many of these million dollar-earning Americans are there? Roberton Williams, a senior fellow at the non-partisan Tax Policy Center, estimates that there are about 433,000 people who will earn $1 million from all sources of income this year.
Williams' number of million dollar-earners is somewhat larger than what the Internal Revenue Service estimates. But either way, there aren't very many of them as a share of the U.S. population.
"So they make a very appealing target," Williams says. "They've got a lot more money, they've done very well and their tax rates have gone down in recent years."
The Bush-era tax cuts lowered the top-level income tax rate, and they also lowered the tax on capital gains, which includes sales of assets like stocks or businesses. That rate is now 15 percent.
An analysis of IRS statistics shows that households earning near the national average — in the $40,000 to $50,000 range — get the vast majority of their income from wages. Those who bring in more than $1 million a year get only about one-third of their income from wages.
Williams says the rich tend to get more of their money from capital gains and dividends.
"The average tax rate at the very top end is about 29 percent at the federal level, but there are a lot of people like Warren Buffett who pay a lot lower tax rate on their total income than do working Americans," Williams says.
Not Enough For The Deficit
But Williams points out that more heavily taxing CEOs, celebrities, sports stars and hedge fund managers isn't the answer to the nation's deficit woes — not even close.
He put together an estimate based on a tax rate that's so high it probably would never happen – 50 percent — and says that if you taxed all income above $1 million at that rate, you'd only get 10 percent of what most experts say is needed to tackle the nation's deficit.
Alan Viard, a resident scholar at the American Enterprise Institute, says the president is making a mistake by putting a focus on taxing millionaires.
"I think what we have to see from both Republicans and Democrats is a greater emphasis on the hard choices we will ultimately have to make, instead of the easy choices we would like to think would be enough," Viard says.
Congressional Republicans have been quick to criticize the Buffet rule; they were all over the Sunday talk shows referring to it as "class warfare." The debate that Warren Buffet started will no doubt rage on through the 2012 elections.