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Table of Contents

Buffett Rule

By
Julia Kagan
Julia Kagan
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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

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Updated January 09, 2023
Reviewed by Akhilesh Ganti
Fact checked by
Katrina Munichiello
Katrina Avila Munichiello
Fact checked by Katrina Munichiello
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Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

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What Is the Buffett Rule?

The “Buffett Rule” was part of the tax plan proposed by President Barack Obama in 2011. It was a fair share tax and got its name from billionaire investor Warren Buffett who famously stated that it was wrong that he pays a lower tax rate than his secretary.

Key Takeaways

  • The Buffett Rule proposed a 30% minimum tax on people making more than $1 million a year.
  • It was part of President Barack Obama's 2011 tax proposal.
  • It was named after Warren Buffett, who criticized a tax system that allowed him to pay a lower tax rate than his secretary.
  • The Buffett Rule contends that the tax system is not fair because it puts a greater proportional tax burden on wages than it does on investment income.
  • The goal of the Buffett Rule is to bring about tax relief for the middle-class and below.
  • Critics state that the Buffett Rule is, in effect, a capital gains tax rate hike that would have a negative effect on business growth.
Warren Buffett

Alison Czinkota / Investopedia

Understanding the Buffett Rule

The Buffett Rule contends that the tax system is not fair because it puts a greater proportional tax burden on wages than it does on investment income. The middle-class shoulder this burden because their income primarily consists of wages subjected to income, payroll, and other federal taxes whereas upper-class income consists primarily of investment income taxed at preferential capital gains rates.

It blames tax code bias for an unfair tax system that forces many middle-class workers to pay a larger proportion of their income in taxes than the wealthy do. The Buffett Rule seeks to remedy the bias by requiring millionaires to pay at least 30% of their post-charitable contribution income in taxes.

The Buffett Rule inspired legislation known as the "Paying a Fair Share Act.” This legislation was first introduced and rejected by Congress in 2012. Similar legislation was introduced and rejected in subsequent years, as well.

Criticism of the Buffett Rule

Critics state that the Buffett Rule is, in effect, a capital gains tax rate hike that would have a chilling effect on business growth. Proponents of the Buffett Rule claim it is the first step to closing a tax loophole with a measure of tax impartiality.

$124.3 Billion

Warren Buffett's net worth as of April 18, 2022, making him the fifth-richest person in the world.

They remind critics that tax code bias helps the very wealthy avoid taxes so that they pay an average effective federal tax rate far short of the top marginal rate they should be paying. They believe the Buffett Rule can usher in middle-class tax relief by making sure that the wealthy pay as large a share of their income in taxes as the middle class does.

How Do Billionaires Avoid Taxes?

There are plenty of methods that billionaires use to avoid paying taxes, much of it coming down to taking advantage of the tax code. Many billionaires pay themselves low salaries in the companies they run, while the bulk of their wealth is tied up in various investments. They are able to borrow against these assets to fund any lifestyle costs as opposed to selling the assets and incurring a capital gains tax. The wealthy also use write-offs and tax deductions to reduce their net income, sometimes to a net loss, to avoid having to pay any taxes at all.

What Does Warren Buffett Say About Investing?

Warren Buffett has a lot to say about investing, much of it boils down to healthy financial habits. He believes individuals should live within their means and not overspend, that people should avoid debt, particularly credit card debt, people should save, returns should be reinvested, people should invest in low-cost index portfolios, people should invest in themselves, and keep cash on hand.

What Does Warren Buffett Say About Taxes?

Warren Buffett believes that wealthy people are undertaxed when it comes to the general population. He believes wealthier people should be taxed more and has taken steps to attempt a change in tax policy to make this happen. Bill Gates, a close friend and colleague of Buffett's also agrees that the wealthy are not taxed enough and this should be changed.

Article Sources
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  1. The National Economic Council. "The Buffett Rule: A Basic Principle of Tax Fairness," Page 1.

  2. The National Economic Council. "The Buffett Rule: A Basic Principle of Tax Fairness," Page 2.

  3. U.S. Congress. "S.2230—Paying a Fair Share Act of 2012."

  4. Forbes. "Warren Buffett."

  5. CNBC. "The Wealthy May Avoid $163 Billion in Taxes Every Year. Here's How They Do It."

  6. The New York Times. "How Democrats Would Tax Billionaires to Pay for Their Agenda."

  7. Go Banking Rates. "10 Genius Things Warren Buffett Says To Do With Your Money."

  8. CNBC Make It. "Warren Buffett and Bill Gates Agree That the Rich Should Pay Higher Taxes —Here's What They Suggest."