Even if Buffett Tax Passes, Middle Class Could Still Get Hit

On Monday, billionaire investor Warren Buffett appeared on CNBC's Squawk Box to discuss the so-called "Buffett Rule," a proposal to increase taxes on America's richest households.

Buffett's plan, as he outlined it, would largely affect the top 1% of families. For those who make $1 million or more, he has proposed a tax rate of 30%, including payroll taxes, while those who make $10 million or more would pay 35%. But even if Buffett's plan passes -- a long shot, given the Republican Party's refusal to consider tax increases on the rich -- experts say that balanced budgets will still require sacrifices across the board.

The Buffett Rule would increase taxes for households that make most of their money from investments. The billionaire's own tax return is a fair example: In 2010, he paid just 17.4% of his income in federal taxes, largely because most of his income was taxed at the 15% dividend and capital gains rate. In other words, the Buffett proposal would more than double his tax rate, increasing it to 35%.

Filling a Big Gap

But Buffett's proposal, while significant, wouldn't fill the hole in the federal budget. According to Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, to do that will require increasing taxes on the middle class. "There aren't enough really rich people to generate the kind of money we need," Williams notes. "To cut the deficit in half, we would need to levy a 90% tax on everyone who makes more than $250,000 per year."

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So where can the rest of the money come from? In a recent article in The New York Times, Adam Davidson noted that increasing middle class taxes by 8% "would actually have a bigger impact than taxing millionaires at 100 percent." But middle class tax increases are staggeringly unpopular, especially in light of continued high unemployment and wage stagnation. Not surprisingly, many politicians have focused on cutting the federal budget rather than trying to increase tax revenue.

Democrats have responded by trying to create a direct link between middle class jobs and upper class taxes. The most explicit version of this argument was presented by Vice President Biden: Defending the "Teachers and First Responders Back to Work Act," a proposal to levy a 0.5% tax on all millionaires, he argued that the relatively minor increase in taxes would put "400,000 school teachers back in classrooms ...18,000 cops back on the street, and 7,000 firefighters back into firehouses."

Ultimately, there is no painless way to balance the budget: Doing so will require some combination of spending cuts, middle class tax increases and tax hikes on the wealthy. The solution, whatever it is, will leave everybody somewhat unhappy.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.