How (and How Much) Should The Rich Be Taxed?

Warren Buffett doesn’t seem like the type of person to cause a huge controversy.  Although he is one of the richest people on the planet (depending on when exactly you are reading this, either he or Bill Gates is likely ranked as THE richest; they seem to switch places so often you’d think they were dancing), he tends to lead a rather subdued life, staying in a rather quaint domicile, not flaunting his wealth, and generally being the plain-spoken, plain-dressing, grandfather type who is easily one of the world’s most beloved billionaires (not that there are too many competitors for that particular title).

Still, Mr. Buffett has caused a bit of a controversy when he put an opinion post in the New York Times entitled Stop Coddling the Super-Rich.  It’s a pretty interesting read, but to keep this post going, I’ll summarize quickly: Buffett makes the point that he, and the other super-rich, ultra high income Americans, pay much less as a portion of their income than do the poor and the middle class.  Buffett notes that he pays the lowest effective tax rate of anyone at his office, even though he is (as you might guess) the highest earner.

 

All of this leads to a few questions that, given our current deficit and the general shape of the economy, takes on a particular importance: How much should the rich and the highest earners in the country pay in taxes?  What sort of taxes should be levied?

Buffett’s Vision

Warren Buffett has the answer: increase the taxes on the super-rich.  He suggests increasing the tax rate paid by those making more than $1 million a year, a small but not inconsequential group (Buffett notes that there were 236,883 households making that much or more in 2009).  Doing so could increase the amount of revenue that the government takes in (not enough to close the gap between our spending and our income, but enough to make it less of a gap).

He also notes that the taxes on capital gains and dividends should also be increased; with 88 of the 400 richest Americans not earning any wages at all and most of the others earning more via investments than you do by working, not raising investment tax rates would not affect them that much (and would likely convince them to take even more of their compensation in the form of stocks or other capital gains eligible forms).

Buffett’s Critics

As you might guess, proposing this sort of drastic change to the tax system didn’t go unnoticed, or un-criticized.  The Wall Street Journal is, as you might guess, rather critical of Buffett, noting several points that Buffett overlooked, from the double taxation of corporate profits (from which many of the highest earners draw their income) to the fact that charitable donations are tax deductible (and that Mr. Buffett, like all the extremely wealthy, can afford to donate a sizable portion of his fortune to charity and take a sizable deduction).

(The WSJ also maintains that Buffett is making Obama’s mistake, considering those earning $250,000 or more as rich, and is thus lumping in many in the upper middle class in with the genuinely upper class.  While this may be a fair point as it goes (and I don’t intend to get too deep into it in this article), Mr. Buffett specifically noted only increasing taxes on those earning more than $1 million each year.  We can argue about where the income line is between middle-class and rich (and perhaps it is over $1 million), but it does misrepresent Buffett’s actual proposal.)

The WSJ also notes, as does this (somewhat tongue in cheek) article on TechCrunch, that there might be a more cynical reason that Mr. Buffett is proposing an income tax increase: he already has made his fortune, and such a tax wouldn’t do anything to affect his existing $47 billion.  The TechCrunch article then goes on to state that if Buffett was really serious about paying more in taxes, he would propose a wealth tax, as that would actually affect his current holdings.

My Thoughts

I have to say, I don’t think Warren Buffett is trying to keep other people from becoming billionaires by raising their tax rates.  (Heck, let’s remember that Buffett has been at this for decades, earning a sizable fortune prior to the tax rates on the highest earners being lowered in the eighties, so the talk of the ‘under-taxed wealth he’s accumulated over the decades’ seems a tad misplaced, unless you’re arguing that the tax rates on the highest earners in the sixties and seventies (70% for those earning over $200,000 in 1970, a whopping 91% for those earning over $400,000 in 1960) was too low.)  Given that his philanthropic nature, giving the bulk of his fortune away, much while he’s still alive, I can’t see him as the type to care too much if there are four hundred other billionaires in the country, or four hundred thousand.

As for the broader discussion of what to do with taxes, I do think there needs to be drastic changes in the tax system, not just increasing the rates on the top earners (although, I think taking that option off the table completely does very little to move the conversation forward and get a better tax system all around).  I’ve expressed my thoughts on the best tax system before, and they are still pretty much the same: a progressive system, not too much of a tax increase from level to level, much lower number of deductions, and linked to government spending to keep the budget balanced (and keep the government from increasing spending while knowing they can pass the bill onto later congresses).

All of this is to say, there needs to a serious conversation about taxes in this country, going (way, way, WAY) beyond the simple issue of tax rates on various tax brackets.  That said, though, I do think Warren Buffett has a point: whatever solution we finally settle on is likely to include some increase in the tax rates paid by the highest earners, if only because, well, there’s where much of the money is.

Where do you stand on the highest bracket tax rates?  Should we add another bracket for the $1 million plus earners?  Is Buffett trying to keep the doors to the billionaire club closed, or is he earnestly trying to offer a solution to a problem in our country?

5 Responses to How (and How Much) Should The Rich Be Taxed?

  1. An important other point that I hear little discussion about is that LLC’s and S-Corps are “pass through” tax systems, in which the company profits “pass through” to the owner’s income tax form. In this case, the owner (who may be personally drawing a salary of $30,000 or $40,000, especially if he’s in the growth stage and wants to reinvest most of the profits) will be personally taxed on the business profits, which may be in excess of $250,000. In other words: increasing taxes on the wealthy can hurt small business growth.

    Of course, if the business wants to buy office supplies, it can write the cost off as an expense. But if it wants to buy large equipment, it has to “depreciate” it over the span of many years — which means the owner needs to pay for the item upfront AND can’t claim it as a tax write-off. He then needs to pay taxes on this money as “profit” even though he already reinvested that money.

  2. I think you have to be careful because the rich have resources to get around most tax increases. I think it would be better to close loopholes and/or go to a flat tax.

  3. @Paula: There’s certainly quite a few issues with the current tax system that seem to needlessly complicated. I do understand that there are plenty of $250,000 a year earners who are far from really wealthy and just trying to get by. (I’m pretty sure that is one reason why Buffett wanted to set the line for increasing taxes at $1 million). The whole ‘pass through’ tax system does complicate matters, especially when, as you mention, corporate profits cause someone to have to pay much more. Simplification of the whole tax system seems like the best approach to take, although, with how things go, in a decade or so, it would likely be just as complicated all over again.

    @krantcents: Very true; but not ever raising taxes on the well-off because they might dodge them doesn’t seem like the best approach. Trying to close loopholes is definitely a good option, although a flat tax seems to have many of the same problems; any level of taxation is going to convince some people to do whatever they can to avoid paying. Finding a good tax system is definitely a tricky process.

  4. My biggest problem with Buffett’s claim of being “coddled” is that he’s hiding behind congress as the reason the “rich” don’t contribute their “fair share.” This is convenient because he can appear to *want* to pay more in taxes, but that darn congress just won’t raises taxes and make him pay more.

    In reality, he (and anyone else) can donate as much as they’d like to pay down the deficit for instance (http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtFinance) If he really thinks the politicians in D.C. are such good stewards of the people’s money, he should step up and make a few billion in donations.

    Of course he won’t, and that’s the point. He’ll still work the system and pay less in taxes as a percent of his wealth than many of his employees do, but he can seem altruistic in the process.

  5. @Joe Morgan: Interesting points. I don’t know that Buffett is just making this argument to appear altruistic; as I already noted, I don’t think this article will make his reputation as generous, if his willingness to give away a sizable portion of his fortune hasn’t already.

    You do raise an interesting possibility of helping to cut down the debt via donating, and that anyone who feels they should be paying more do have options even if tax rates stay the same. That said, I think you, me, and Buffett can all agree that depending on the willingness of people to pay more than the absolute minimum they legally have to pay to the government is a recipe for never getting the deficit closed (to say nothing of that whole ‘national debt’ thing). No, there needs to a broader national discussion of how to get our financial ledger in order, which will have to include both spending cuts and increases in tax revenues (more of the former, from my point of view, but trying to get the budget balanced without even considering the latter would likely involve such deep cuts as to be political suicide.)

    Will Buffett and other huge earners continue to take advantage of every opportunity they can find to reduce their tax liability? Of course; that’s why (I imagine) Buffett is arguing that we need to cut down the number of opportunities, and in the process, hopefully balance the federal budget (or at least, come closer to it than we are now).

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