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The Buffett Tax Twists



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Yesterday in the New York Times, Billionaire Warren Buffett renewed his call to increase taxes on the rich. While I wished he would spend half the time and energy he spends calling for tax increases on advocating spending cuts, the piece does have a few interesting features. First, Buffett wants to increase taxes on households making above $500,000. That limit is $250,000 higher than that of President Obama, who would rather increase taxes on taxpayers making above a quarter of a million dollars a year. 

Buffett also disagrees with the president about what the government’s goals for taxing and spending should be. President Obama’s objective for the country in 2022 is a tax collection of 20 percent of GDP and spending levels of 22.6 percent (see Midsession Review document here). Buffett writes:

Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again.

On the tax side, for instance, he is right that revenues of 18.5 percent of GDP has been attained before even if saying that it was “attained over an extended periods in the past” is an exaggeration. Yet, Buffett’s objective is more realistic than other soak-the-rich plans (including the president’s). Take the often-praised Simpson-Bowles plan: It called for an unrealistic 21 percent-of-GDP level of taxation, when a quick look at the Office of Management and Budget’s historical tables reveals that the federal government has never been able to achieve that goal. In fact, under the current tax system, the federal government  has a hard time collecting more than 19 percent of GDP in tax revenues, and sustain that level for very long, no matter how high the top marginal tax rate goes. From 1930 to 2012, tax-revenue collection in the United States has never topped 20.9 percent, averaging 16.5 percent of GDP over 80 years, despite the drastic historical fluctuation in tax rates on the wealthiest Americans. 

Interestingly, as James Pethokoukis notes over at the AEI blog, to reach the 18.5 percent goal, the best is to keep the current tax rates:

One effect of this rule would be to raise investment tax rates dramatically from today’s 15% level, which would be anti-growth. But that point aside, does Buffett really think we can only get revenue to 18.5% of GDP via tax hikes? Turns out, the long-term CBO budget forecast pegs revenue at 18.5% of GDP in 2022 even while keeping the Bush tax cuts in place. That’s right, if we do nothing other than let the economy continue to recover we’ll hit Buffett’s revenue target, according to the CBO.

But that’s not what Buffett wants, apparently. In his piece, he also renews his call for a minimum tax on high incomes — 30 percent on taxable income between $1 million and $10 million, and 35 percent on incomes above $10 million. 

Now, there are a few problems with that. For instance, it isn’t clear that the new tax would really generate that much revenue. As Robert Frank of CNBC wrote yesterday morning “According to data from the Tax Policy Center, there would be 603,000 Americans in 2015 who make $1 million or more. Only about a third of them would be subject to the Buffett Rule, which means that two thirds already pay more than 30 percent.” Previous scoring by the Joint Committee on Taxation earlier this year found that the Buffett tax would raise $47 billion from 2012 through 2022 if imposed on taxpayers earning more than $1 million ($500,000 for married individuals filing separately). Needless to say, even if you are in favor of more taxes on the rich, you have to admit that this won’t get you very far. Besides, if history is our guide, more revenue for Washington only means more money to spend on new stuff, doing nothing about our deficit problem.

But I don’t think Buffett really cares about that. #more#In fact, his main point seems to be that the case for raising taxes on the rich (whether by getting  ”rid of arrangements such as “carried interest” or implementing a millionaire tax) is a moral one. According to him, rich people pay less in taxes than the middle class, and that’s unfair. The problem is that, with a few exceptions, that’s incorrect. Here is some data from Frank: 

Buffett talks about half of the country’s 400 highest earners paying less than 20 percent. And he says a few “actually paid nothing.”

True enough. And that’s an outrage to someone who pays the 25 percent or 35 percent official tax rate.

But what Buffett doesn’t mention is that, on average, very few Americans actually pay the official tax rate, due to deductions and credits. On average, everyone pays less. When it comes to what Americans actually pay, the high earners and “wealthy” still pay more than twice the rate as the middle class.

The latest data from the IRS shows that people who make $1 million or more had an average tax rate of 20.4 percent in 2010. (Read more: The Millionaires Who Pay the Highest Tax Rate).

Tax filers who earned $30,000 to $50,000 paid an average rate of 4.8 percent, while those who made between $50,000 and $100,000 paid 7.7 percent. Those making under $30,000 had a negative effective rate, meaning they paid no federal income taxes after deductions and credits.

Put another way, millionaires pay a rate that’s nearly three to four times the rate paid by the middle class.

Even the super-rich, or those who make more than $10 million and rely more on investment income taxed at 15 percent, have an effective rate of 20.7 percent.

Buffett also seems to assume that the federal system is regressive, but that too is incorrect

Finally, Buffett should be extremely careful what he wishes for. As we know, there is often a big difference between who is targeted by a given tax and who actually pays that tax, so anyone calling for increasing taxes should be careful. In this case, I would go further: I think it is irresponsible for a super-millionaire to be calling for more taxes, even if only on him and other millionaires, because no matter how willing he is to pay more taxes themselves, or no matter how much he assumes they are to pay more, there is a real chance that the burden will fall on many people making a lot less money than he does. The good news is that if he is really eager to raise money for the U.S. Treasury, he can — along with other really rich people calling for more taxes on the rich — cut the U.S. Treasury a check. There’s even a website he can use to facilitate that choice. 

Again, I wish that Warren Buffett would put the same level of energy calling for lower spending than he does for higher taxes. We are in this mess because of Washington’s bipartisan spending addiction. Cutting spending is hard, I understand. It is harder than cutting taxes and, apparently, it is harder than talking about putting revenue on the table. It’s too bad, because cutting spending is the only way out of this debt explosion we are facing. 



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