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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Buffett Rule

What it is:


The Buffett Rule is a tax rule change included in President Barack Obama's 2013 budget proposal. If implemented, the rule would ensure that individuals who earn more than one million dollars per year pay a minimum effective tax rate of at least 30 percent.

How it works (Example):

Millionaires who earn most of their income from their salary will not be affected, as their tax rates are already higher than 30%. But taxpayers who earn the majority of their income from investments or hedge-fund partnerships are taxed at 15 percent and would have to pay substantially more.

The Buffett Rule was inspired by Warren Buffett's opinion article featured in The New York Times, "Stop Coddling the Super-Rich."

In the article, Buffett criticized the current U.S. tax system, saying, "While most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks." 

Buffett explained that he paid an effective tax rate of 17.4% of his taxable income, which was lower than 20 people who worked in his office. "Their tax burdens… averaged 36 percent," wrote Buffett in the article. 

He attributed this to the fact that he, along with many other affluent Americans, receives the majority of his income from capital gains, which are often taxed at a lower rate. Income from long-term capital gains are taxed at 15%, whereas normal earned income is taxed based on a person's income tax bracket, which may range from 10% to 35%.

[See what tax bracket you're in: Federal Income Tax Brackets -- 2011]

Why it Matters:

According to an October 2011 study by the Congressional Research Service, nearly 200,000 taxypayers or more will be affected by the Buffett Rule. Any changes to taxation of investments is sure to have a dramatic effect on the stockbond and real estate markets as investors adjust their portfolios to mitigate the effects of increasing taxes.  

If the Buffett Rule is implemented, many teams of experts -- Tax Foundation, Citizens for Tax Justice and the United States Congress Joint Committee on Taxation -- estimate that the result would be anywhere from $36 to $50 billion per year in additional tax revenue.

The Buffett Rule was submitted for diliberation as Senate Bill S. 2059, Paying a Fair Share Act of 2012, and received a 51-45 majority of senate votes on 4/16/2012. However, it failed to earn the 60 votes required to overcome a filibuster.

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