Buffett Rules!

President Obama’s Super Committee proposal makes the case for $1.6 trillion in new revenue from tax reform that would lower tax rates, close loopholes such as the ones that exist for oil and gas companies, roll back the Bush tax cuts for upper-income earners, and restore fairness in the tax code. Included in this package of revenue policies is something the president has dubbed the “Buffett Rule,” which states that people making over $1 million should not pay lower taxes than those in the middle class.

The Buffett rule is less a specific policy and more of a guiding principal, the concept of which could not come at a more appropriate time. While our income tax code includes six marginal tax rate percentages, the highest-income taxpayers often end up paying lower marginal rates than those in the middle class, because 1) tax subsidies tend to disproportionately benefit high-earners, and 2) the rate at which capital gains and dividends are taxed is much lower than the rate at which wage income is taxed. This is why Warren Buffett pays a lower tax rate than his secretary.

In fact, the highest income households are enjoying some of the lowest taxes in generations. Since 1979, our overall average tax rate has fallen slightly, but for those at the top of the income ladder, the rate has fallen dramatically. While average tax rates went from 22.2 percent of income in 1979 to 20.4 percent of income, for the top 1 percent of households the rate has fallen from 37 percent of income to 29.5 percent of income, a reduction of over a fifth. It’s even more pronounced for the highest income earners: the tax rate for the top 400 households (average income $350 million!) fell from 26.4 percent in 1992 to 16.6 percent 15 years later, a nearly 40 percent reduction.

The diminished tax burden on high income earners has both expanded our deficit and helped make us a more unequal society. The Buffett rule is long overdue.

 Note: Updated figures show that for 2008, the top 400 paid an average tax rate of 18%. This chart reports 2007 numbers because that is the most recent year the Congressional Budget Office offers information for both the top 1% of households and the average tax rate.