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?

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