Like its predecessor, Buffett's latest essay is getting a lot of media attention and a lot of flak from the usual suspects.
The essay is notable not so much for what the Sage of Omaha has to say about the specifics of a boosted rate for the mega-rich, which he's pretty much said already, but rather his calling out of Grover Norquist, the drown-government-in-the-bathtub man. Investors aren't going to stop investing if their income taxes go up, Buffett says. That's not how it works. If there is money to be made, even if a bigger hunk of it will go to the government, investors will invest, he says.
President Obama should send the guy around to encourage all the "signers" of the Norquist no-tax pledge to wise up, although that cohort of Congress is dwindling on its own.
As before, Buffett writes that the ultrarich, including him, are getting off ultra-easy under the current system and that he therefore supports Obama's plan to raise their taxes. He puts the cut-off point at $500,000 instead of the $250,000 level to which the president has said he is firmly committed. Writes Buffett:
Additionally, we need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30 percent of taxable income between $1 million and $10 million, and 35 percent on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.That would be an improvement. But not enough.
Above all, we should not postpone these changes in the name of “reforming” the tax code. True, changes are badly needed. We need to get rid of arrangements like “carried interest” that enable income from labor to be magically converted into capital gains. And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.
The Times botched the headline on Buffett's op-ed with "A Minimum Tax for the Wealthy." The tax rates he proposes are on big incomes, not big wealth. Obviously, big incomes usually lead to, or emerge from, big wealth, but they are not the same. Buffett's adjusted gross income last year was $62.86 million. But his wealth is in the $47 billion range. For 2010, he paid $6.9 million to the IRS, an effective tax rate of 11.06 percent. Based on his own marginal tax rates proposal, he would have paid $21.3 million. If, however, he had paid a wealth tax based on Daniel Altman's recent proposal of 2 percent (on net assets), Buffett would have paid $940 million in taxes. Even at a tenth of that rate, he would have paid four times more than he actually did.
Of course, there are big problems with a wealth tax: It would take considerable constitutional finagling and probably an amendment to make legal; capital flight has been a problem for at least some of the countries, such as France, that impose a wealth tax (France's is a progressive one topping out at 1.8 percent; liquidity is a problem; and the amount of revenue raised hasn't been very high.)
So, while the equity of it makes sense, a wealth tax is almost certainly out of the question. But neither Buffett's nor Obama's plans would boost rates on the highest incomes to where they ought to be. In addition to that minimum 35 percent rate for the mega-rich, their proposed top marginal rate would max out at only 39.6 percent. That is, the rate it was raised to from 31 percent under Bill Clinton in 1993. But other than that precedent, what makes 39.6 percent the magic number?
A couple of prize-winning economists who have done extensive work on inequality of income and wealth are Emmanuel Saez and Thomas Piketty. Even if you've never heard of them, you're probably aware of one of the fruits of their work—discovering U.S. income inequality in 2007 to be as bad as it was as anytime since 1917 as shown in this graph. A later graph showed the effects of the recession.
Saez and Piketty think the Buffett Rule would not do much to reverse that inequality. And they don't think much of tax rates that top out below 40 percent. They want a more graduated tax rate system, with added higher brackets:
As much as Mr. Piketty’s and Mr. Saez’s work has informed the national debate over earnings and fairness, their proposed corrective remains far outside the bounds of polite political conversation: much, much higher top marginal tax rates on the rich, up to 50 percent, or 70 percent or even 90 percent, from the current top rate of 35 percent.Far outside the bounds of polite conversation, perhaps. But what's polite about the current economic circumstances of tens of millions of Americans?
“The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”Absolutely on the money, pun intended.
One of the expressions that has gotten a lot of play in the past few years on a variety of subjects in public discourse is "all options on the table." No reason Saez and Piketty's idea shouldn't be one of those options that gets discussed in polite company (or otherwise). If a 70 percent marginal rate on income over, say, $10 million can be put on the table, perhaps it will be negotiated down to 50 percent in exchange for something like a progressive estate tax. After all, inequality can't be moderated with a single change.
If we're destined for a serious discussion about taxes, let's make it serious.
teacherken has a post discussing the subject here.