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Top earners can find ways around Buffett rule minimum tax rate

business Updated: Apr 15, 2012 22:48 IST
The Washington Post
The Washington Post
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The highest-earning US households have ways to escape President Barack Obama's Buffett rule with tax-planning techniques that would limit their liability and undermine the proposal's purpose.

Those affected taxpayers the fewer than 0.5% of Americans with annual incomes exceeding $1 million and tax rates of less than 30% could take advantage of tax-free investments such as municipal bonds to escape the Buffett rule's bite. They also could time asset sales for maximum tax benefits, engage in transactions that don't result in taxable income and make charitable contributions that yield deductions.

"Largely, the Buffett rule is going to be manageable," said David Miller, a partner at Cadwalader, Wickersham & Taft in New York. "That is, with tax planning, people will be able to avoid it."

The proposal would deny high-income taxpayers many deductions and other breaks they use to drive down their average tax rate without closing out the tactics employed by the wealthiest, most sophisticated taxpayers.

The rule, named for billionaire investor Warren Buffett, would require that taxpayers with at least $2 million in adjusted gross income pay a minimum rate of 30% and would impose the increase on a sliding scale for those with income between $1 million and $2 million.

Obama has been campaigning for the proposal in advance of a procedural vote on Monday in the Senate. Republicans are expected to block the Buffett rule bill, which requires 60 votes to advance in the Senate.

Preferential tax treatment for capital gains and dividends is among the reasons why some high-income households have relatively low effective tax rates, and one result of the Buffett rule would be to raise effective tax rates on capital income.

The Buffett rule measure would generate $47 billion for the government over the next decade, according to the Joint Committee on Taxation. That estimate assumes that income tax cuts expire as scheduled at the end of 2012; if those cuts are extended, the bill would generate about $162 billion, according to Whitehouse's office.

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