I was hoping to end my discussion of the Buffett Rule with this post last Friday. However, no rest for the weary. On Tuesday, an organization named "Citizens for Tax Justice" entered the fray. CTJ published a report advocating for the Buffett Rule.
I've been critical of CTJ in the past. On June 1, CTJ published a report "analyzing" the financial statements of 12 "illustrative" U.S. corporations. I believe that the purported "analysis" contained material inaccuracies and omissions. I sent a letter to Tax Notes suggesting that CTJ's report was borderline unethical (131 Tax Notes 1199 (June 13, 2011)). I was concerned that unsophisticated readers would take CTJ's misleading "analysis" at face value. As expected, the political left feigned outrage over CTJ's dubious conclusions.
The latest report from CTJ has its weaknesses, but raises some interesting questions. Unlike the June report, CTJ's advocacy of the Buffett Rule doesn't taint the organization's credibility. Five observations:
 Mega-billionaire Warren Buffett hasn't released his tax returns, so this is speculative. CTJ states that Buffett has long criticized the "loopholes" in the tax code that allow him to pay a lower effective tax rate (at 17.4%) than his middle-class secretary (at 30%). A "loophole" is defined as "an ambiguity in a system, such as a law or security, which can be used to circumvent or otherwise avoid the intent, implied or explicitly stated, of the system."
The tax code is filled with loopholes (as defined), but it is unlikely that Buffett is exploiting one. More likely, he simply derives a large proportion of his annual income from qualified dividends and capital gains. Qualified dividends are taxed at a 15% rate, because the distributing corporation was previously taxed on its earnings at a 35% rate. The same principle applies to capital gains from the disposition of stock in a corporation with accumulated earnings. The tax preference reflects an explicit Congressional judgment to blunt the "double taxation dilemma" associated with the taxation of C corporations and their owners. It is no more a "loophole" than any number of tax preferences that are widely available to virtually all taxpayers.
CTJ may not be happy with the result, but they should tone down the misleading rhetoric.
 CTJ claims that Buffett's effective tax rate (17.4%) is "typical" of taxpayers with $10 million or more of income. CTJ's claim is inconsistent with the data on page 3 of its report. Based on those numbers, the "average" taxpayer with $10 million or more of income pays an effective tax rate of approximately 24.6%.
Again, words are important. Buffett is not "typical" of uber-wealthy individuals. The data suggests that the $10 million club is comprised of two groups. One group recognizes a large proportion of its income from qualified dividends and capital gains, taxable at the 15% rate described above. The other group recognizes a large proportion of its income as ordinary income (wage income or other income for services (athletes, celebrities) or short-term capital gains (hedge fund managers)).
CTJ wants the first group (the investors) to pay tax at rates comparable to the second group (the athlete/celebrity/hedge fund VIPs).
Consensus and Questions
 I agree with CTJ on a fundamental principle. I believe that all income should be taxed at the same tax rates.
I suspect we disagree on the next principle. I believe that we should lower income tax rates for corporations and individuals (with the decrease in revenue offset, in part, by an increase in tax rates applicable to capital gains). My two principles work in tandem. The decrease in the top marginal corporate income tax rate would undermine much of the rationale for the 15% tax rate (as described above).
 CTJ compares an individual taxpayer with $60,000 in wage income and an individual taxpayer with $60,000 in qualified dividends and capital gains. The former pays an effective tax rate of approximately 30% (including employer and employee payroll taxes; more on that in my next post). The latter pays an effective tax rate of 4%. I would lower the tax rate applicable to the wage earner, offset in part by higher taxes on the investor. Does this increase the overall "fairness" of the tax system in CTJ's view?
 On a similar note, CTJ states that "it’s downright unfair when millionaire investors pay effective tax rates far lower than those of most middle-income people." (To get there, note that CTJ is including payroll taxes in the computation of effective tax rates for middle-income taxpayers.) But isn't it unfair when middle-income investors (the individual with $60,000 in investment income above) pay effective tax rates far lower than those of middle-income wage earners? And isn't it unfair when gazillionaires pay effective tax rates far higher than other gazillionaires?
The "fairness" point highlights why the proposed Buffett Rule is a class warfare strategy, as discussed here and here. CTJ compares the tax rates paid by millionaires to the tax rates paid by the middle class. I'm concerned about the disparate treatment of wage earners and small business owners relative to the investor class. I'm concerned about efficiency and fairness, but I don't need class warfare rhetoric to articulate the concern. We don't need a "Buffett Rule" to accomplish fundamental tax reform. We simply need legislators who are willing to prioritize and compromise.