What Exactly Is the Buffett Rule?

| Wed Sep. 21, 2011 1:30 PM EDT

Megan McArdle is, unsurprisingly, less enthusiastic about the "Buffett Rule" than I am. But I admit that she brings up a good point: what exactly is the Buffett Rule? Generally speaking, it's the idea that millionaires shouldn't be able to use loopholes and avoidance strategies to end up paying lower tax rates than middle-class families. This suggests something like what the Alternative Minimum Tax used to be: a minimum tax rate that kicks in for high earners if their net tax rate falls below a certain percentage of their gross income.

But that doesn't appear to be what President Obama is proposing. Rather, here's what his economic plan says:

To begin the national conversation about tax reform, the President is offering a detailed set of specific tax loophole closers and measures to broaden the tax base that, together with the expiration of the high-income tax cuts, would be more than sufficient to hit the $1.5 trillion target for tax reform and cut inefficient expenditures as well as move the tax system closer to observing the Buffett Rule. These measures include: cutting tax preferences for high-income households; eliminating special tax breaks for oil and gas companies; closing the carried interest loophole for investment fund managers; and eliminating benefits for those who buy corporate jets.

OK then. The idea isn't to set up some kind of firm tax cutoff, it's to move the tax system "closer" to observing the Buffett Rule. That may be a little less gratifying than a flat number, but it actually makes things easier to judge. In essence, Obama wants to go back to the rules of the pre-Bush era plus two other things: cap itemized deductions at 28% for high earners and abolish the carried interest loophole.

Unfortunately, there's one thing missing here: as part of the rollback of the Bush tax cuts, does Obama also want to roll back the cuts to the capital gains tax rate? The plan doesn't say so, so I assume the answer is no. (There would be no point in eliminating the carried-interest rule, for example, if capital gains rates were the same as rates on ordinary income.)

So I'm not sure what to make of this. These changes would, indeed, move the tax code "closer" to observing the Buffett Rule, but not much closer. It's the low capital gains rate that really makes the difference at high income levels. Obama's plan would reduce the number of high earners who pay very low rates, but it probably wouldn't reduce it very much.

On the other hand, because this isn't some kind of brand new proposal, it is easier to decide if you like it. I've long been in favor of returning to Clinton-era rates on high earners, and I've long been in favor of eliminating the carried interest rule — though I'd probably eliminate it for everyone, not just Wall Street types. The value of capping deductions is a little less clear, but probably OK. (Though I'm open to contrary arguments.) Overall, then, I'm in favor of it.

Anyway, it appears that we're not going to get the Buffett Rule. We're going to get some Buffett-esque Guidelines. Sort of. But at least it's a good start.