Stop Coddling Warren Buffett

Long ago tycoon Warren Buffett famously observed that his secretary had a higher tax rate than did the great investor himself.  On August 14 in The New York Times, Buffett once again trotted out that factoid in "Stop Coddling the Super-Rich."

Mr. Buffett wants the super-rich to pay more in taxes.  The big question for Buffett is why he wants to give the feds more money when he knows they'll just waste it.  The problem in D.C. is spending, not revenue.

Warren Buffett seems a good man. He's certainly generous, as he's given away billions to charities. But now he wants his fellow billionaires to "give" more to the I.R.S. Plus, he seems to be advocating taxing all types of income -- including capital gains, dividends, "carried interest," etc. -- at the same rate, which will surely get a rise out of some toffs. I'll leave that item to others and address the following issues:

First, Buffett lumps payroll taxes in with federal individual income taxes, as when he writes of "my federal tax bill -- the income tax I paid, as well as payroll taxes paid by me and on my behalf."

He shouldn't lump them in together, because the payroll tax is a dedicated tax for Social Security and Medicare. Progressives refer to these programs as "social insurance." People are paying for a benefit they themselves will someday receive. So one could think of payroll taxes just as easily as insurance premiums.

Income taxes, on the other hand, aren't dedicated; they go into the general fund and are used for every expense of the federal government.

So lumping these two revenue streams together muddies Buffett's argument, and allows him to claim tax rates for his secretary and underlings that are higher than the highest statutory income tax rate. Using Buffett's logic, one could also lump the cost of health insurance mandated by ObamaCare onto one's "federal tax bill" and get one's tax rate up even higher.

Buffett would have made a stronger case by separating payroll and income taxes. But then he may be trying to pave the way for taking the cap off the Social Security portion of the payroll tax. The better way to address tax reform is one tax at a time. Buffett goes on to write:

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion -- a staggering $227.4 million on average -- but the rate paid had fallen to 21.5 percent.

If the I.R.S. confiscated the entire income of these 400 Americans, all $90B of it, it would reduce a $1.5T deficit by 6 percent. One might conclude that Buffett's primary interest is equity or fairness rather than the budget deficit.

Since Buffett is contrasting the tax rates of the 1990s with those that came after, I recently pointed out that the highest effective tax rate on the top 1 percent of taxpayers during the 1990s was 24.2 percent. Would Buffett be satisfied if Congress set the top statutory rate in 2011 to the top effective rate of the 1990s? If so, that brings up a glaring omission in Buffett's article, and that is what he thinks about exemptions for the super-rich. Congress can raise the tax rates on high-earners, but if they retain exemptions it may all be for naught. Mr. Buffett deserves special thanks for the following paragraph:

Twelve members of Congress will soon take on the crucial job of rearranging our country's finances. They've been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It's vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country's fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

What this 12-member commission should do is recommend balancing the federal budget within 3-5 years, and began by cutting $300B-$500B out of the FY2012 budget baseline. If Congress followed through on such a recommendation, I daresay that Standard and Poor's, Egan-Jones and the other ratings agencies would give America back her AAA rating immediately.

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Jon N. Hall is a programmer/analyst from Kansas City.