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The Buffett Rule

Why Obama's Plan to Tax the Rich is So Controversial

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Warren Buffett

Billionaire investor Warren Buffett

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The Buffett Rule is a controversial Obama administration policy raising taxes on Americans who earn more than $1 million a year but pay a smaller portion of their earnings to the government than do middle-class workers.

Details of the Buffett Rule

The policy was included in President Barack Obama's 2012 budget plan sent to Congress. It states: "People making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay." The policy defines middle-class Americans as those earning less than $250,000 a year.

The Buffett Rule would raise taxes in an estimated 60,000 millionaires and raise about $13 billion in revenue over a decade. Most of the taxpayers impacted would be private equity, venture capital and hedge fund managers whose capital-gains earnings were previously taxed at a mere 15 percent.

About the Name

The policy is named after billionaire investor Warren Buffett, who called on the White House to raise taxes on the rich in an effort to reduce the nation's growing national debt and reduce the burden on the struggling middle class during the worst economic slump since the Great Depression.

"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks," Buffett wrote in an August 2011 op-ed piece in The New York Times.

Who Supports the Buffett Rule

Congressional Democrats overwhelmingly support the Obama administration policy because they believe it would not only help reduce the national debt by generating more revenue but also represent a more equitable way of taxing American wage-earners.

Most middle-class taxpayers already pay at least 15 percent of their earnings to the government – the same as America's top earners – and many are taxed at 25 percent, not including payroll taxes for Social Security and Medicare.

"Right now, Warren Buffett pays a lower tax rate than his secretary, an outrage he has asked us to fix. We need a tax code where everyone gets a fair shake and where everybody pays their fair share," said Obama, speaking before a joint session of Congress in September 2011.

Who Opposes the Buffett Rule

Most congressional Republicans oppose the Buffett rule. They accused Obama of waging class warfare in the run-up to the 2012 presidential election, pitting frustrated middle-class Americans against wealthier "job creators" in the midst of economic turmoil.

Republicans also argued that raising taxes on any segment of the population would have negative consequences on economic growth. They pointed out that the wealthiest 1 percent of Americans already pay about 22 percent of all state and federal taxes, far more than middle-class and poor taxpayers.

"Class warfare will simply divide this country more," U.S. Rep. Paul Ryan, a Republican from Wisconsin, told FOX News. "Class warfare may make for really good politics, but it makes for rotten economics."

Further Background

Although the wealthiest Americans pay larger sums to the Internal Revenue Service than do middle-class wage-earners, their tax rates have fallen in recent decades even as their earnings soared.

The 400 wealthiest Americans earned $16.9 billion and paid federal taxes of 29.2 percent on that sum in 1992, IRS data show. By 2008, the wealthiest 400 Americans earned $90.9 billion but were paying a substantially smaller portion in taxes – 21.5 percent.

Buffett, who is among those wealthiest Americans, paid $6,938,744 in federal taxes in 2010, only about 17.4 percent of his taxable income of about $40 million. His coworkers, by comparison, paid 33 percent to 41 percent of their income in federal taxes.

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