Math or Class Warfare

In defending his proposal to ensure that millionaires not pay taxes at lower rates than ordinary wage earners—the Buffett rule—the president said, “It is not class warfare. It is math.” I was reminded of the experience I have had many times when I have talked about the fact that the distribution of income in the United States has become dramatically less equal in recent years, especially at the very top. Average incomes have stagnated while incomes of the very well-healed have sky rocketed. Often someone in the group shouts, “class warfare” or “populism,” meaning “don’t go there.” The shouter thinks invoking images of angry peasants with pitchforks and torches advancing on the castle ought to end any conversation about the distribution of income or wealth.

Well, I’m with the president on this one. The distribution of income and the impact of our tax code on it ought to be widely discussed. According to the most recent Congressional Budget Office numbers, since 1980 the portion of pre-tax income earned by the median quintile of the population has gone from 16 to 13 percent. The portion earned by the top five percent has gone from 21 to 32 and the top one percent from 9 to 19. The increase in the concentration of wealth at the top has been even more dramatic. Meanwhile, the tax laws have shifted in favor of the high rollers. The reason Warren Buffett’s secretary pays income tax at a higher rate than he does is that much of his taxable income is in the form of capital gains, dividends, and perhaps carried interest (the term for earnings of hedge fund managers), which are taxed at lower rates. Mr. Buffett has been courageous in this pointing out and rallying a group of fellow millionaires and billionaires to work for reforms that would increase their taxes.

The Buffett rule proposed by the president, however, is largely symbolic. It is a form of Alternative Minimum Tax (AMT) that would leave the current tax code pretty much untouched, but add another provision to ensure that millionaires paid at least an average tax rate. A better approach would be to blow up the tax code and start over, getting rid of almost all special provisions (including the lower rates on capital gains, dividends, and carried interest) and taxing all income at the same rate. The tax reform proposals in the Simpson-Bowles and Domenici-Rivlin plans would do this—and a lot more—and would result in a simpler, fairer tax system. Comprehensive tax reform should be part of the “grand bargain” to stabilize future debt that the Joint Select Committee has the opportunity to enact. The president should be urging them to go in that direction.