The Buffett Rule: Tax Reform Plan Is a Perfect Fit for Obama 2012

John Grgurich
Brendan Smialowski
Brendan Smialowski

In a recent conference call with reporters, the White House made the case for a minimum tax on millionaires, ahead of a speech in which President Barack Obama will make it the centerpiece of his re-election campaign. The president's advisers say it will address the problem of income inequality in America and reduce the deficit. Republicans call it class warfare.

Here's what adoption of the tax -- or lack thereof -- might mean for all of us.

The Oracle of Omaha speaks

As proposed, the tax would require those making more than $1 million per year to pay 30% to the federal government. Right now, the highest federal income tax bracket is 35%, but few actually pay that percentage because the tax code leaves so much room for maneuvering.

According to a report from the White House Economic Council, in 2008 the 400 wealthiest Americans paid an average federal income tax of just 18%. This 30%, then, would be a bare minimum to be paid on income, no matter what else the tax code might say to the contrary.

The idea was proposed last fall by billionaire Warren Buffett, CEO of Berkshire Hathaway (BRK-B), when he discovered that he paid less taxes on a percentage basis than his secretary. It was instantly picked up as a talking point by Obama and has since become known simply as "the Buffett rule."

Capital Gains and Private Equity

As it becomes clearer that Mitt Romney will be the Republican nominee for president, making the Buffett rule the centerpiece of his campaign platform is an obvious move for Obama. Romney is very wealthy, and famously made his millions in private equity as the head of Bain Capital.

Private equity firms typically make money by buying companies, reconfiguring them, and then selling them. Any profit made on the sales of the reconfigured companies is taxed as capital gain, which translates into a flat 15%.

When it was revealed that Romney only paid about 15% on $21 million in income over the past two years, it became political ammunition for both Romney's Republican challengers and Obama -- all of whom were more than happy to paint him as an of an out-of-touch elite in an economically struggling America. In that sense, the Buffett rule was made to order for the president's upcoming campaign.

Warren Buffett
Warren Buffett

Gallery: Thanks Mitt and Newt: A Dozen Tax Tips for the Rest of Us

Mitt Romney Taxes
Mitt Romney Taxes




You Can't Blame a Guy for Trying

Of course, it's not Romney's fault his taxes are what they are. That's the tax code as it stands, and by all accounts, there's no funny business surrounding his filings.

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But Romney's particular case, high profile as it's become, only serves to underline what many people see as a system that rewards those with the means to manipulate it, or at the very least get the most out of it. This point of view has dangers associated with it.

In October 2011, the nonpartisan Congressional Budget Office released a report showing that in the last 30 years, "income grew by 275% for the top 1% of households, 65% for the next 19%, just under 40% for the next 60%, and 18% for the bottom 20%." When things get too economically uneven, and people feel they have nothing left to lose, they can take to the streets. Look at Athens, or Paris, or London. Whether you feel Occupy Wall Street has a good case to make or not, nobody wants to see a peaceful movement burst into violence.

Citizens, politicians and members of the business community on both sides of the aisle have been calling for tax code reform for some time now. No one likes taxes, but the country can't run without them.

Politics aside, the Buffett rule carries a lot of weight because of the simple fact of who proposed it: one of the richest men in America and no foe of the free market. It may be a step in the right direction, not only to fix the budget and the national debt, but also to reduce the income inequality that may someday lead to true class warfare. Buffett's idea, now Obama's, is one of many. Let's hear more.

Motley Fool contributor John Grgurich owns no shares in Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway, and Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway.


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