President Obama has proposed a "Buffett Rule" that no household making over $1 million annually should pay a smaller share of its income in taxes than what middle-class families pay.
Associate Professor, Duke University's Fuqua School of Business
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Professor McAdams' research interests focus on microeconomic theory. He previously worked as special assistant to the director, Bureau of Economics, Federal Trade Commission.
"Although this rule increases taxes, it lowers marginal tax rates. Thus, if anything, the 'Buffett Rule' will incentivize small-business owners to create new jobs."
McAdams uses the following example to illustrate the point: Consider a "millionaire" whose 2011 income consists of $1 million in capital gains and $100,000 from a chain of hot dog stands. The millionaire pays 15 percent on capital gains and 35 percent on net income from the hot dog stands, for a total of $185,000 ($150,000 + $35,000) and an average tax rate of 16.8 percent, less than the 25 percent marginal rate paid by many middle-class earners. Under the "Buffett Rule," the millionaire will pay 25 percent on all income, for a total of $275,000. However, the millionaire now keeps 75 cents of every additional dollar that he generates through the hot dog stands, compared to 65 cents before the Buffett Rule. Thus, the millionaire has more of an incentive than before to grow his business, hire more workers, and so on.
"By raising revenues and lowering marginal tax rates, the 'Buffett Rule' is exactly the sort of tax reform that economists -- and Republicans -- should be able to get behind."