What is the 'Buffett rule' and why does a faction of the Labor party want it?

The left faction of the Labor party is pushing the idea of introducing a so-called “Buffett rule” and will try to have it adopted as official policy at the next ALP national conference in 2018.

What is a Buffett rule?

It stems from 2011, when the US billionaire investor Warren Buffett said he was horrified to discover that his secretary paid more tax than he did, as a proportion of income, thanks to tax loopholes introduced by the former president George W. Bush. He said the US tax system needed to change to prevent this from happening and the Obama administration tried to do so in 2012.

The administration defined the rule as part of measures to ensure “everyone making over $1m a year pays a minimum effective tax rate of at least 30%”.

“No household making more than $1m each year should pay a smaller share of their income in taxes than a middle-class family pays,” it said.

But it couldn’t get the support of Congress.

Has it ever been proposed in Australia?

The Australia Institute thinktank published a paper in 2015 called Closing the Tax Loopholes: A Buffett Rule for Australia, arguing for a similar rule to be introduced here (the paper was commissioned by the activist group GetUp).

It said Australian Tax Office statistics showed 75 of Australia’s wealthiest individuals earned more than $1m in 2011-12 but paid no income tax at all.

It said those 75 people had pre-tax income of $195m but they used various tax deductions to reduce their combined taxable income to just $82.

“Each of these individuals earned more than $1m for the year but had an average taxable income of just $1.09,” the Australia Institute said. “Reducing one’s taxable income does not come cheap. The ATO statistics show that these 75 people paid, on average, almost $860,000 each to manage their tax affairs.”

It proposed a Buffett rule to ensure Australia’s ultra-rich would be unable to reduce their taxable income below a certain level – it suggested a level of 35%.

Who would it apply to?

The institute said the rule should only apply to people who earned $300,000 or more – the top 1% of income earners in Australia – because they would be the people most likely to exploit tax deductions to aggressively reduce their taxable income.

It said it was important to note the 35% tax rate would only be a floor on the amount of tax paid.

“This tax would not apply to someone earning $300,000 or more who paid an average rate of tax above 35%,” the paper said. “The tax only applies if someone earning $300,000 or more, through tax deductions reduces, their average rate of tax below 35%.

“Many high-income earners do not aggressively minimise the amount of tax they pay and for them this new rate of tax will not apply.”

The National Centre for Social and Economic Modelling (NATSEM) found 31,524 of households would be affected and they would each contribute an average $79,053 a year more in taxes than they currently were, raising an extra $2.5bn for government each year.

What happened to the idea?

Two months after the Australia Institute’s paper in 2015, the Labor MP Anthony Albanese floated the idea at the ALP national conference.

He said the extra $2.5bn in revenue could be spent on “infrastructure, on schools, on hospitals”, arguing it was “simply unacceptable” that the wealthiest Australians could reduce their taxes so aggressively.

“This is an issue on which we can mobilise people – because they know that the nurses, the teachers, the miners, the construction workers – they shouldn’t be paying all the tax while the millionaires simply are able to minimise theirs,” he said.

But his proposal was not adopted as official Labor party policy.

Didn’t the Greens want to have one?

The Greens leader, Richard Di Natale, proposed his own Buffett rule in April 2016. The party wanted to enforce a minimum income tax liability of 35% for individuals with total income above $300,000, indexed every two years from the date of implementation in line with growth in male total average weekly earnings.

According to costings by the Parliamentary Budget Office, his plan would raise $7.3bn in revenue for the commonwealth over four years.

He took his plan to the election but little was heard about it on the campaign trail.

So what happens to the ALP left faction plan now?

The left met in Melbourne on the weekend and the idea was exhumed (but Albanese wasn’t at the meeting and this push hasn’t come from him).

The faction dominates the party’s national policy forum, which has the task of shaping a policy platform to take to the next national conference.

If the NPF adopts the Buffett rule, the idea will then go into a draft economic platform that will have to be debated at conference.

If the policy is accepted at national conference, it will be very hard for the shadow treasurer, Chris Bowen, to ignore it.

The Labor MP Pat Conroy (a member of the Left) told Guardian Australia on Wednesday the idea should be given “very strong consideration” but Bowen dismissed the idea.

“This approach isn’t the best way to address inequalities in the system,” he said. “We have policies on superannuation, negative gearing and capital gains that ensure our tax concessions are made fairer and sustainable.”