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Read My Lips: Fairer Taxes

David Callahan

The “Buffett Rule” proposed by President Obama and now being considered by the Senate would be an important symbolic step toward a fairer tax system. By instituting a minimum tax on very high earners, it would advance the principle of progressive taxation and reform the tax code in an overdue way.

By itself, though, the Buffett Rule does not go nearly far enough. It should be a small piece of a much larger agenda for restoring fairness to America’s tax system. Some of this agenda is reflected in President Barack Obama’s 2013 budget proposal, but other important ideas are not yet being seriously considered. Here are six such ideas that should be part of the national debate.

Create New Top Tax Brackets

The Obama budget plan would let the Bush tax cuts lapse at the end of this year for households making over $250,000, and the highest tax bracket—for those making over $388,351—would be 39.6 percent. While this is important, Congress should go further and enact the Fairness in Taxation Act, proposed last year by Representative Jan Schakowsky, It would add a new set of top tiers to the income tax code for those earning over a million dollars, and set the tax rate for the highest bracket at 49 percent. This proposal acknowledges vast disparities in earnings among the affluent and the fact that it isn’t fair to tax a couple making $390,000 at the same rate as a billionaire. Prior to the Reagan tax cuts, the federal tax code did a better job at making such distinctions with more graduated tiers of brackets for higher earners.

Tax Capital Gains and Dividends as Regular Income

The current tax code is intrinsically unfair to the majority of Americans—the W-2 crowd—who work for a living and earn little money from capital gains or dividends. Nearly half of Americans own no stocks, for example. The Buffett Rule would only modestly reduce these inequities. Meanwhile, another element of President Obama’s 2013 budget plan—raising capital gains tax rate to 20 percent for high earners—also doesn’t go far enough since this rate would be about half that of the top income tax bracket. A fairer approach would be to tax all income from capital gains and dividends as ordinary income, with limited exemptions. This step would raise $1 trillion over the next decade, with most of that money being paid by affluent households.