Here are a few thoughts on Warren Buffett’s column in today’s New York Times:
Buffet complains that “while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks.”
First, nothing in federal or state law requires taxpayers to ferret out and claim every available tax break. Yet Mr. Buffett, it seems, is quite adept at limiting his tax burden. He writes that he sent the IRS a little over $6.9 million last year, about 17.4 percent of his taxable income.
To put his tax burden in perspective, consider that in 2007 the “total effective federal tax rate” of the wealthiest 1 percent of taxpayers was 29.5 percent, according to the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.
For 2008, the IRS itself reports:
For returns reporting positive adjusted gross income, the top 1 percent of taxpayers had an average tax rate of 23.3 percent; the top 10 percent of taxpayers had an average tax rate of 18.7 percent; and the bottom 50 percent of taxpayers had an average tax rate of 2.6 percent.
But those statistics refer only to the wealthiest 1 percent of taxpayers, most of whom dare not dream of the riches earned by the likes of Mr. Buffett. What about the “super-rich” to whom Buffett refers in his op-ed?
No matter how one cuts it, Buffett’s total federal tax burden of 17.4 percent is below the norm for the “super-rich.” Among the wealthiest 0.1 percent of taxpayers, for example, the average tax rate in 2008 was 22.7 percent. Even among the top 400 taxpayers, Buffett still fared well. The average rate among this elite group still came in at 18.1 percent. Clearly, Mr. Buffett’s tax accountants earned their fees.
Buffett also argues that his tax burden is considerably below those of his employees. He writes that his 17.4 percent tax burden was “actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”
If this is accurate, Buffett ought to loan out his tax team to his employees. The same IRS tax data indicates that our tax code is an enormously progressive one, in the sense that, on average, high-income taxpayers fork over a much higher percentage of their income to the IRS than do the less well-heeled. Let’s say Buffett’s employees are in the top 10 percent of all taxpayers. If so, they appear to be vastly overtaxed. In 2008 that bloc’s average tax rate stood at 18.7 percent. (If you’re wondering, the average tax rate for all taxpayers in 2008, according to the IRS, was only 12.2 percent.)
Buffett writes toward the end of his piece:
I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.
The super-rich, it seems, need to “be told to pay more in taxes.” That, indeed, seems to be the case. Consider the experience in Massachusetts. When offered the opportunity to voluntarily pay more taxes than state law requires, the super-rich in one of our most liberal enclaves have just said no. In the wake of a cut in the state income tax in 2000, a local citizens group launched a successful effort to appease those who opposed the tax cut. As a result, since 2003, the Massachusetts state-income-tax forms contain a check-off box allowing taxpayers to elect to pay at the old, higher rate. As Massachusetts political analyst Jon Keller reports in his book The Bluest State:
In the first year  this . . . option was available, 843 of the state’s two million tax filers opted to pay the higher rate. By 2006, that microscopic number had slipped to 527 — one-fortieth of one percent of all taxpayers.
My suspicion is that when Mr. Buffett says that his investment behavior is not influenced by marginal tax rates or other nettlesome provisions in the tax code, he betrays his true motivation for making that next billion. For him, investment is a sport from which he apparently derives great pleasure. Why not project that same mindset on his other fabulously wealthy friends? If we could clone Buffet a thousand-fold, surely we would all be wealthier and the making of tax policy would be easier. Out with behavioral economics! Be gone the supply-side school!
But what about the millions upon millions of small business owners for whom the marginal tax rate does make a difference? What about those investors and entrepreneurs who invest to make a profit? For them, the current environment of tax-code uncertainty and several agencies’ regulations-on-steroids approach is a show stopper.
Little wonder why there is so much capital on the sidelines awaiting a positive, pro-growth signal from Washington.
— Michael G. Franc is vice president of government studies at the Heritage Foundation.