New Study Shows Buffett Rule Doesn't Solve America's Budget Problem

Although few liberals like to admit it, math is at the center of this nation’s fiscal future. We can wax nostalgic about all the programs we want to save and all the good that such and such bureaucracy does, but in the end, if you can’t afford it, you can’t afford it.

Right now the math is pretty tough. Using a fairly realistic estimate, the Congressional Budget Office predicts that debt as a share of GDP would exceed its World War II peak of 109 percent by 2023 and would approach 190 percent of GDP in 2035. Of course, that latter number would never be reached because our creditors wouldn’t let it. Long before then our investment grade would be downgraded, our interest rates would soar as investors perceive more risk, and we would be well on our way to becoming the next Greece, the only difference being that our economy is too big to bail out.

So the math is hard, but it’s not impossible. Just last week Rep. Paul Ryan introduced a plan that would achieve budgetary balance by 2035 – a date that is still too far away for many fiscal conservatives. Nevertheless, Ryan didn’t shy away from making the hard choices. He fundamentally reformed Medicare, returned Medicaid primarily to the states, got the ball rolling on Social Security changes, and completely remodeled the tax code.

It’s an ambitious look at just what it will take to solve the deficit equation.

For their part, Democrats see the solution in a much different way. Rather than reduce government spending (indeed, under President Obama’s budget they would increase spending) they focus on revenues, that is to say, taxes.

To that end one of their, for lack of a better word, “boldest,” ideas is the so-called Buffett Rule. Democrats have remained intentionally vague about the parameters of the plan, but as President Obama described it in his State of the Union, “if you make more than $1 million a year, you should not pay less than 30 percent in taxes.”

Republicans labeled the idea an opening salvo in Obama’s attempt to stir up class warfare in an election year. But Democrats, seeing that they could tap into a powerful populist vein, defended the idea.

“This is not class warfare. It’s math,” President Obama declared.

And here we are, back to full circle on the idea that the deficit is essentially a problematic math problem. So, knowing that, just how close does the Buffett Rule get us to a solution? New data from the Joint Committee on Taxation (JCT) shows not very close at all.

The JCT analysis of the legislative vehicle for the Buffett Rule introduced last month by Sen Sheldon Whitehouse (D-RI) finds that the proposal would only collect $47 billion through 2022 – an average of just $4.7 billion each year. That’s a drop in the bucket compared to the $901 billion forecasted deficit for 2013.

The problem is that the higher you raise marginal tax rates the more you increase incentives for people to find ways around paying them. The Wall Street Journal reports:

“One problem, according to congressional estimators, is that many millionaires would find ways to avoid the new rule, mostly by cutting back on stock sales and other transactions that produce capital gains.

. . . Wealthy people also could speed up asset sales so that they would occur before the new minimum tax goes into effect. That would actually reduce the government’s projected tax take by about $6 billion in 2014, because so many taxpayers would accelerate asset sales.”

The incredibly low revenue estimate doesn’t come close to presenting a full picture of the problems with the Buffett Rule. Not only would it would fail to raise much money, but it would incentivize many of the most productive people in society to work less or move their investments to other countries.

Our national debt is a huge number that requires some tough math (and tough decisions) to solve. Class warfare in the form of higher taxes on the wealthy may be good politics, but it is not a viable solution to the equation. To achieve budgetary balance Washington must begin by reducing its outsized spending habits.