The Corner

Who Wants to Tax a Millionaire?

The Obama administration needs money — a lot of money — to pay for past and future stimulus, particularly because its so-called stimulus proposals have failed to reduce unemployment and will continue to fail. That’s why it’s not surprising that the president is once again trying to get tax revenue from the people with the most money to spare, hence the new proposal for a tax meant to hit millionaires – in this case the so-called Buffett tax, named after billionaire Warren Buffett — which would prevent millionaires from paying lower tax rates than middle-class Americans.

First of all, let me note that there is something unseemly about the idea that a super-millionaire like Warren Buffett should be setting tax policy, no matter how talented and successful he is as a businessman. If Warren Buffett would like to pay more taxes, he should simply send a check to the federal government instead of imposing his love for high taxes on other successful Americans.

Buffett also wants to impose his vision for how big the government should be, since ultimately, the fight over how much the government collects in tax revenue isn’t just about tax burden, it’s also about how much the government intervenes in our lives. Obviously, Warren Buffett likes having spending at its current 25.3 percent level, which is why he is trying to find ways to pay for it. Yet not everyone shares Buffett’s views about the proper size of government. I certainly don’t, and I assume the millions of voters who took a stand on November 2010 and asked that government spending be reduced don’t either.

Second, there is usually a huge discrepancy between who is targeted by a given tax and who actually pays that tax (more on that at the end of the post), so anyone calling for increasing taxes should be careful. In this case, I would go further: It is incredibly irresponsible for these super-millionaires to be calling for more taxes, because no matter how willing they are to pay more taxes themselves, the burden will likely fall on many people making a lot less money than they do.#more#

For one thing, if the tax discourages earning from higher income people or reduce their wealth it could hinder job creation, hence hurting non millionaire Americans. A few years ago when the idea of a millionaire tax was first floated, an acquaintance who manages a hedge fund told me:

Economically, the play will disincentive folks like me to work—the tax now puts me well over the 50% tax bracket, will give me an incentive to find better tax strategies to protect my wealth and earnings and ultimately lead to a DECREASE in jobs for the U.S.

Such policies could have dramatic effects in the current economic climate. For one thing, while the president is catering to its liberal base, these announcements of more taxes in the future are signaling to the American people that things are not about to get better. This new plan is just more of the same and it’s not going to help lift the current uncertainty and business paralysis.

Of course, the White House disputes that the president is seeking tax increases in the current weak economy because the new taxes won’t be collected until 2013. But that’s not helping. Why would anyone make long-term plans to invest and hire new employees today knowing that taxes will take more of your income and wealth in two years?

I am skeptical that this tax will increase revenue that much. With taxes like this one, dynamic effects really matter — bad incentives will discourage earning and cut into tax revenue, which defies the point, doesn’t it? James Pethokoukis reminds us:

Higher taxes on small business and entrepreneurs would slow growth and reduce tax revenue. It would also encourage greater efforts at tax avoidance. The 1993 Clinton tax hikes, for instance, only generated a third of the revenue that CBO forecasted. And those increases were instituted when the economy was growing at a steady 3% clip, not stuck in slow-growth mode like the U.S. economy currently is. From Obama’s speech, the it seems to me that the Buffett Rule is probably a special capital gains tax rate of 28 percent for people making $1 million a year.

The president spends a lot of time talking about the fairness of the tax code. The question here is, “Do the rich pay their fair share in taxes?” The top 1 percent of income earners pay 38 percent of income taxes and earn 20 percent of income, which is highly progressive (more here).

In addition, Harvard University’s Greg Mankiw has a good article on NBER where he explains why Buffett’s claims doesn’t hold water. For instance, when Buffett talks about how he only pays 17.7 percent of his income in tax, he is likely misleading his audience.

One might wonder how Mr. Buffett gets away with a tax rate of only 17.7 percent, while a typical millionaire is paying so much more. Most likely, part of the answer is that Mr. Buffett’s income is made up largely of dividends and capital gains, which are taxed at only 15 percent. Bycontrast, many other top earners pay the maximum ordinary income tax rate of 35 percent on their salaries, bonuses, and business income.The distinction is crucial for understanding how much the rich pay. Indeed, the share o top incomes coming from capital is much lower now than it has been historically. According to the Piketty and Saez data, for the very richest Americans — those in the top 0.01 percent of the distribution — the percentage of income derived from capital fell from 71 percent in 1929 to 33percent in 2007. If your image of the typical rich person is someone who collects interest and dividend checks and spends long afternoons relaxing on his yacht, you are decades out of date.The leisure class has been replaced by the working rich.

Another piece of the puzzle is that Mr. Buffett’s tax burden is larger than it first appears,because he is a major shareholder in Berkshire Hathaway. When the C.B.O. studies the tax burden, it includes all federal taxes, including individual income taxes, payroll taxes, and corporate income taxes. In its analysis, payroll taxes are borne by workers, and corporate taxes by the owners of capital. For the richest 1 percent of the population, 10.4 percentage points of their 31.2 percent tax rate comes from the taxes that corporations have paid on their behalf. The corporate tax would undoubtedly loom large if the C.B.O. were to calculate Mr. Buffett’ s effective tax rate.

So it is simply wrong to say we don’t have a progressive tax system. The best analysis shows that average federal tax rates rise steeply with income.

To conclude, it seems that at the very least Mr. Buffett should be careful of what he wishes for. That he has the president’s ear may lead to more taxes on others, and less fairness by important standards.

I wrote about the millionaire tax in Reason back in February 2010 during the health-care debate.


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