Billionaire investor and philanthropist Warren Buffett has called on Congress to “stop coddling the super-rich” and raise taxes on the wealthy to deal with our nation's fiscal woes in his most recent New York Times op-ed (www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html). He claims that the taxes he pays are only 17.4 percent of his taxable income and that it is time to engage in shared sacrifice and raise taxes on him and his “mega-rich friends” (those who make $1 million or more a year in income, dividends, and capital gains). Buffett's seemingly altruistic recommendations parallel that of fellow billionaire philanthropist Bill Gates' proposal in 2010 for Washington state to create an income tax for those making more than $200,000 annually. His tax proposals might seem like a quick and easy way to raise revenue, but what are the real consequences of his proposals?
According to Buffet, we need not worry about how raising such taxes might undermine economic growth. He writes, “I have worked with investors for 60 years and I have yet to see anyone... shy away from a sensible investment because of the tax rate on the potential gain.” Such an assertion flies in the face of elementary microeconomics. Increasing taxes on the potential profit from an investment alters the expected return and rational investors will adjust their behavior accordingly.
He insists that “people invest to make money, and potential taxes have never scared them off.” Never? Does Buffett expect people to believe that investment behavior is somehow different from all other forms of economic behavior where people weigh costs against benefits? If so, one wonders why we don't have a capital gains tax of 99.9 percent!
During the 1950's, America's top marginal income tax rate was roughly 90 percent. Some liberals look upon those tax rates with nostalgia but only because they do not realize how little revenue the government was able to collect; few of the rich ever paid the top tax rate because they either didn't bother earning additional income that would be taxed at 90 percent or they found other ways of earning wealth so that it would be not taxed. President Kennedy changed that when he dramatically reduced taxes for the rich and revenue collection grew.
But it is not the 1950's and the top marginal tax rate is roughly 35 percent. Increasing taxes on the wealthy might very well lead to increased revenue. However, many conservatives fear that increasing revenue collection through tax increases on the wealthy will take the pressure off Washington D.C. to reduce spending and reform entitlements. Furthermore, higher taxes could make America less business friendly and less competitive in the global economy. Soaking the rich might seem like a good idea... until you run out of rich people.
The contrast between California and Texas is illuminating. High taxes in California hasn't translated into generous benefits for California where the unemployment rate is amongst the nation's highest. In Texas, tax rates are low, government services are comparable, and unemployment is amongst the nation's lowest.
Warren Buffett has undoubtedly heard such arguments but he dismisses them and proclaims, “My friends and I have been coddled long enough by a billionaire-friendly Congress,” and that it is time for shared sacrifice. If Mr. Buffett feels that he should be paying more taxes, he could easily forgo his dividends and capital gains (where he pays a roughly 15% tax) and collect a comparable salary from Berkshire Hathaway instead (where he would pay roughly 35%). He does not need to declare his charitable contributions and claim associated deductibles on his tax return. Yet, he states that he and many other mega-rich folks “wouldn't mind being told to pay more in taxes.” If Mr. Buffett likes paying taxes so much, why doesn't he pay more?
If he did so without announcing it in a Times op-ed, it would nullify the most tangible consequence of his tax proposals: convincing people that he is a great guy. It is that same impulse that compels someone to hold a press conference for his own philanthropy and lands him on the cover of Fortune magazine. Note the reference in his op-ed to the Giving Pledge (which he helped create) and the title of a previously published NYT Buffett op-ed: “Buy American. I am.”
To be fair, Mr. Buffett is hardly alone. Bill Gates' tax-the-rich proposal would have created a 5% percent income tax in the state of Washington for those making over $200,000. The ballot measure was defeated with 65% of voters opposing it.