The Exception That Does Not Prove the Buffett Rule

Warren Buffett has long been associated with phenomenal investing success while proffering  the homespun advice of living modestly and investing in things you understand. More recently, however, Buffett's name has become associated with the "Buffett rule," a new alternative minimum tax  that ensures the wealthy pay an effective income tax rate of at least 30 percent.

The Buffett Rule emerged after Buffett's observation that his secretary paid a higher effective tax rate than he did, despite her markedly lower income. President Obama has apparently seized upon the Buffett Rule as the economic centerpiece of his re-election campaign.

A closer examination, however, suggests that Buffett and his secretary present an exceptional and perhaps questionable anecdote rather than a pattern.

For one thing, Buffett claimed in a New York Times op-ed that his staff paid an average effective tax rate of 36 percent. If so, his staff must be particularly bad at figuring their taxes.

• The Tax Policy Center, a joint project of the center-left Brookings Institution and the Urban Institute, says that the average effective tax rate for all taxpayers was 18.8 percent in 2011. And for earners in the middle of the distribution-the middle 20 percent of taxpayers-their average effective tax rate was 12.6 percent. The Congressional Budget Office (CBO) says middle-income taxpayers have an effective tax rate of 14.3 percent.
  
• Even the liberal group Citizens for Tax Justice says that middle-income taxpayers paid an effective rate of 13.9 percent.
  
• By contrast, estimates of the average effective tax rate for people in Buffett's income class range from 32.1 percent (Tax Policy Center) to 29.5 percent (CBO).

So, while the estimates vary slightly, they strongly suggest that not only do the wealthy pay far more in taxes than do middle-income workers, they also pay a higher effective tax rate than their secretaries.

In fact, Buffett's anecdote puzzles almost anyone who scrutinizes it, since the top individual tax rate is 35 percent.  How did Buffet's secretary pay more than the top rate?

It's bad enough that the Buffett Rule would harm the economy by redirecting capital from the private economy into more wasteful government spending. But it also appears that the Buffett Rule is based on questionable assertions and anecdotes that fly in the face of analysis by multiple sources from across the political spectrum.

Drastic changes in tax policy should be based on careful economic analysis and sound data, not questionable anecdotes. The Buffett Rule should be recognized as a harmful bit of political propaganda, and not much more.