The Real Risk Behind the ‘Buffett Rule’

Posted: 11 Apr 2012 09:21 AM PDT

The misinformation on both sides of the so-called Buffett Rule debate has reached epic proportions.

: Associated Press

The left says the rule is needed for revenue and fairness, though the rule on its own does little for either.

The right says the rule will hurt job creators – despite overwhelming evidence that the wealthy have plenty of cash already and are choosing to hoard it or invest in gold, overseas stocks and other things that don't create jobs. We already have historically low rates for the rich and they’re not creating jobs.

Still, there is a broader problem with the Buffet Rule: It would arguably be the most unreliable tax on the planet. That's because it targets the most unstable income source of the most unstable income group in America.

Essentially, the Buffett Rule is a tax on the capital gains and dividends of the highest earners. As we learned over the past four years, capital gains and dividend income is subject to wild market fluctuations. Those fluctuations, in turn, cause the incomes of the highest earners (who are the biggest capital gains earners) to also swing wildly.

Consider the data. The population of Buffett Rule targets – or Americans earning $1 million or more – declined by 40% between 2007 and 2009, the latest period for which IRS stats are available. No other income group in the IRS charts showed such a rapid fall.

What's more, declines in tax revenues during the recession in states like New York, New Jersey, Massachusetts and California fell precipitously. In California, those collections fell by more $9 billion between 2007 and 2009, while in Massachusetts, cap gains tax collections declined by 75%.

In sum, capital gains are highly volatile, and so are the incomes of the million-plus earners, which depend on market gains and stock dividends for income.

This is not to argue that the tax is good or bad. And some years, when markets are booming, the tax could earn more than projections.

But with the number of eligible payers swinging more than 40% in two years – and the salaries themselves swinging even more – the Buffett Rule could feasibly earn dramatically less than it's projected $5 billion a year.

And that's not the kind of tax you'd want to depend on.