Warren Buffett is the second richest man in the world and one of America’s great investors. He’s certainly someone whom you’d look to for sound investment advice. But just as basketball fans would be unwise to take hoop tips from Roger Clemens, Americans shouldn’t look to Buffett for counsel on federal tax policy.
Buffett has led the charge against the repeal of the estate tax. Never mind the unfairness of a tax which is levied on money that has already been taxed once. He’s argued for changing the accounting rules on stock options — in effect increasing taxes on the private sector by billions. And he’s led the opposition to ending the double-taxation of dividends. His argument has been that repeal would “further tilt the tax scales toward the rich.”
Making the rich “pay their fair share” sounds noble, but Buffett’s analysis is all wrong for a number of reasons.
First, successful Americans already pay their fair share … and then some. According to the latest data from the Tax Foundation, the top-earning 25 percent of taxpayers are garnering 67.2 percent of the nation’s income, but paying 84 percent of federal income taxes. While the average American has an effective (after deductions) federal income-tax rate of 15.3 percent, the top 1 percent of earners pay almost twice that: 27.5 percent.
Second, liberals hold fundamentally flawed opinions on tax burdens. Buffett and liberals argue for a progressive tax system. They insist that “progressive” means not only that the rich pay more in dollars, but more as a percentage of their income. The amount of tax as a percentage of income is the guiding factor of their analysis.
But when it comes to tax reduction (such as the 2003 tax cut recently enacted into law), that method of assessment is thrown out the window. Does it matter to liberals that more successful Americans will get a smaller benefit (as a percentage of their income)? No. Does it matter that more successful Americans will still, after the 2001 and 2003 tax bills are fully enacted, pay more of their taxes in income? No. In the view of Buffett and his allies, when it’s a question of tax reduction, the only thing that matters is dollars, not percentages. Accordingly, if a more economically-successful American — who paid more in taxes to begin with — gets one more dollar in tax relief than a less successful American, then the tax cut is “unfair.” The left’s inconsistency of analysis is truly remarkable.
Finally, greater progressivity — as Buffett argues for — comes at a substantial economic cost. Ramping up tax rates on more successful Americans only discourages productive economic activity. Lower taxes and lower marginal tax rates lead to higher growth for the economy as a whole.
In lieu of tax-cut proposals like eliminating the double taxation of dividends, Buffett has argued for ideas such as a “flat-sum rebate to people with low incomes.” There are two problems with schemes like this. First, Keynesian demand-side stimulus has consistently proven to be far less beneficial to the economy than supply-side tax cuts, such as cutting marginal tax rates or removing levies on productive activity. But further, because of our very progressive tax system, millions of low-income Americans pay no income tax at all. So what Buffett proposes isn’t even a tax cut or refund, but merely the federal government handing out checks to people. This is also known as government spending.
Buffett can best be described as a “limousine liberal” — he’s got his stake and short of 100 percent government confiscation, he’ll always be rich. So he can comfortably argue for punitive tax burdens on enterprising Americans who — while hard-working — have been less successful than Buffett. But while Buffett’s ideas on federal taxation may cheer the hearts of liberals, they are a prescription for economic malaise.
— John Berthoud is president of the National Taxpayers Union.