Obama and the Buffett Tax

In his speech to Congress earlier this month, President Obama jabbed at our tax code. "Right now, Warren Buffett pays a lower tax rate than his secretary -- an outrage he has asked us to fix," he said. "We need a tax code where everyone gets a fair shake and where everybody pays their fair share."

He's referring, of course, to Buffett's New York Times op-ed last month, when the Berkshire Hathaway (NYS: BRK.B) billionaire pointed out that his tax rate was about half that of rank-and-file Berkshire employees. "My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice," Buffett wrote.

Tomorrow, Obama is expected to do just that, proposing what's being called the "Buffett Tax," effectively ensuring that those making more than $1 million a year have a tax rate at least equal to middle-income workers.

There are no details on how the plan might work -- and Obama isn't expected to outline specifics tomorrow. But here are three things to keep in mind.

How much revenue would it raise?
Buffett has said in the past that a main reason for fixing the discrepancy between his tax rate and middle-income workers is simple fairness. But if we're talking about raising revenue to lower deficits, how much might such a plan bring in? Hard to say. In an interview with Charlie Rose, Buffett hinted that a similar plan could raise $550 billion over 10 years, but it's very difficult to project these things accurately, particularly when there are no specifics.

Whom would it hit?
Our tax code is still largely progressive up until the very top:


Source: IRS, 2009. Top-400 data from 2007.

The vast majority of those making more than $1,000,000 probably wouldn't see much change from the Buffett Tax, because their tax rates are already above those of middle-income workers. It's not until you get to the extreme top, such as the top 400 filers, before average rates regress. In 2007, the top 400 tax filers had an average income of $344,000,000, taxed at an average rate of 16.62%. That was less than the average tax rate paid by a household making $100,000 a year.

Can it pass?
In this Congress, I don't think the plan stands a chance of passing. One side of the legislature has made it clear that no tax increases are politically feasible. The Buffett Tax is likely to go down as a symbolic gesture highlighting what many see as a flaw in our tax code, but it's unlikely to become law anytime soon.

What do you think about the idea? Sound off below.

At the time thisarticle was published Fool contributorMorgan Houselowns shares of Berkshire Hathaway. Follow him on Twitter, where he goes by@TMFHousel.The Motley Fool owns, and Motley Fool newsletter services have recommended buying, shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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