Tag Archives: warren buffett

Brantley agrees with Obama that the rich should pay more

The Laffer Curve, Part I: Understanding the Theory

Max Brantley is fond of accusing Republicans of coddling the rich and here comes Warren Buffett and validates both what President Obama and Brantley have been saying. However, will the increase in taxes have the desired result that they are wanting?

Higher Tax Rates on Rich Won’t Increase Revenues

by Alan Reynolds

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

Added to cato.org on September 13, 2011

This article appeared on Investor’s Business Daily on September 12, 2011.

In last week’s campaign speech disguised as an address to Congress, President Obama said, “Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix.”

Writing recently in The New York Times, the famed chairman of Berkshire Hathaway complained that his federal income tax last year was “only 17.4% of my taxable income” — less than $7 million on a taxable income of about $40 million.

Buffett claimed that, like himself, other “mega-rich pay income taxes at a rate of 15% on most of their earnings,” but that is not at all common. The average income-tax rate of those earning between $1 million and $10 million was 29.5% in 2009.

Obama used Buffett’s uniquely low 17.4% tax as proof that “a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets.” That is not true.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous.

Anyone whose income is almost entirely composed of realized capital gains or dividends would “pay income taxes at a rate of 15% on most of their earning.” Investors with modest incomes also pay a tax rate of 15% on dividends and capital gains, although that rate is scheduled to rise to 18.8% under the Obama health law (and much higher if Congress enacted the “reforms” Obama will propose next Monday).

Before 2003, when the tax on dividends was made the same as the tax on capital gains, Berkshire Hathaway was a handy tax dodge — a way to own dividend-paying stocks without paying taxes on the dividends. Buffett is famous for collecting stocks with a generous dividend yield without Berkshire itself paying any dividend.

The dividends Berkshire receives are reinvested in buying more stocks, so the holding company ends up with more assets per share which results in capital gains that would be taxable only if the shares are sold.

Warren Buffett is the second wealthiest person in America, but he reports surprisingly little taxable income for someone who owns more than $50 billion of Berkshire shares. Increasing the tax rate on salaries and interest income would barely affect him.

He pays himself a salary of just $100,000, which explains how he pays less than his employees do in payroll taxes. He dodged the estate tax by donating his wealth to the Bill and Melinda Gates Foundation. He doubtless reduces his taxable income with other donations to charity, which explains why he repeatedly refers to taxable income rather than adjusted gross income.

Mr. Buffett ends by appointing himself tax czar and declares he “would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more … (he) would suggest an additional increase in rate.”

Since he only reports $100,000 of salary, he has nothing to lose by advocating a higher tax rate on salaries. Nearly all of his income in 2010 consisted of capital gains on sales of Berkshire shares, because those shares pay no dividends. But Buffett could just as easily hang onto appreciated shares rather than selling them, or he could donate them to charity.

Raising tax rates on dividends and capital gains sounds easier than it is. Nobody with substantial wealth can be forced to realize taxable gains by selling appreciated assets. A realized gain is no more valuable than an unrealized gain. On the contrary, it is less valuable by the amount of the tax.

Nobody can be forced to hold dividend-paying stocks either. They can instead buy Berkshire Hathaway shares if the tax on dividends goes up, as Buffett understands.

Despite his personal and professional dependence on capital gains, Buffett nevertheless feigns total ignorance of who pays the capital gains tax and why. He says, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9% in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Well, the Dow Jones industrial average was 831 at the end of 1977 — down from 969 at the end of 1965 — so somebody was having trouble finding investments that would still look sensible after paying a 39.9% tax.

In any case, for Buffett to focus on the act of buying stocks or property is all wrong. The capital gains tax is not a tax on buying assets. It is a tax on selling assets. If you don’t sell, there is no tax. And when the capital gains tax is high, very few people are willing to sell.

In 1977, when the capital gains tax was 39.9%, realized gains amounted to less than 1.57% of GDP. From 1987 to 1996, when the capital gains tax was 28%, realized gains rose to 2.3% of GDP. Since 28% of 2.3 is larger than 39.9% of 1.57, the lower tax rate clearly raised more tax revenue.

From 2004 to 2007, when the capital gains tax was 15%, realized gains amounted to 5.2% of GDP. Since 15% of 5.2 is larger than 28% of 2.3, the lower tax rate again raised more tax revenue. The government cannot afford to raise this tax, particularly on those most likely to pay it.

Buffett focuses on the 400 tax returns with the highest reported incomes, which are often one-time capital gains from the sale of a business or real estate.

“In 1992,” he writes, “the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2% 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%.”

In 1992 only 39% of reported income of the top 400 came from capital gains and dividends because those tax rates were so high. With most reported income coming from salaries, the average tax rate was high.

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

 

More by Alan Reynolds

By 2008, 67% of reported income of the top 400 came from capital gains and dividends because both were taxed at 15%. That diluted the average tax rate, yet nevertheless resulted in much more taxes paid because the amount of reported income was so much larger.

The big change was not in actual income, but merely in what the IRS counts as income. People were hiding more of their wealth in 1992 than they did in 2006-2008, and they were hiding even more in 1977.

It is easy to advocate a higher tax rate on capital gains, but it is even easier to avoid paying that higher tax rate. Simply hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses.

The evidence is undeniable that affluent investors and property owners report far fewer gains whenever the capital gains tax goes up. Choosing to pay tax on capital gains and dividends is usually voluntary, and when the rate gets too high we run short of volunteers.

With the super-high 1977 tax rates of 39.9% on capital gains and 70% on dividends and salaries, federal revenues were 18% of GDP. In 1992, revenues were only 17.5% of GDP. In 2007, thanks in large part to a 15% tax rate on capital gains and dividends, revenues were 18.5% of GDP.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous. It didn’t work then, and it wouldn’t work now.

The Laffer Curve, Part III: Dynamic Scoring

Uploaded by on May 28, 2008

A video by CF&P Foundation that builds on the discussion of theory in Part I and evidence in Part II, this concluding video in the series on the Laffer Curve explains how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that “static scoring” should be replaced with “dynamic scoring” so that lawmakers will have more accurate information when making decisions about tax policy. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org.

Brantley agrees with Obama that the rich should pay more

The Laffer Curve, Part I: Understanding the Theory

Max Brantley is fond of accusing Republicans of coddling the rich and here comes Warren Buffett and validates both what President Obama and Brantley have been saying. However, will the increase in taxes have the desired result that they are wanting?

Higher Tax Rates on Rich Won’t Increase Revenues

by Alan Reynolds

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

Added to cato.org on September 13, 2011

This article appeared on Investor’s Business Daily on September 12, 2011.

In last week’s campaign speech disguised as an address to Congress, President Obama said, “Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix.”

Writing recently in The New York Times, the famed chairman of Berkshire Hathaway complained that his federal income tax last year was “only 17.4% of my taxable income” — less than $7 million on a taxable income of about $40 million.

Buffett claimed that, like himself, other “mega-rich pay income taxes at a rate of 15% on most of their earnings,” but that is not at all common. The average income-tax rate of those earning between $1 million and $10 million was 29.5% in 2009.

Obama used Buffett’s uniquely low 17.4% tax as proof that “a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets.” That is not true.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous.

Anyone whose income is almost entirely composed of realized capital gains or dividends would “pay income taxes at a rate of 15% on most of their earning.” Investors with modest incomes also pay a tax rate of 15% on dividends and capital gains, although that rate is scheduled to rise to 18.8% under the Obama health law (and much higher if Congress enacted the “reforms” Obama will propose next Monday).

Before 2003, when the tax on dividends was made the same as the tax on capital gains, Berkshire Hathaway was a handy tax dodge — a way to own dividend-paying stocks without paying taxes on the dividends. Buffett is famous for collecting stocks with a generous dividend yield without Berkshire itself paying any dividend.

The dividends Berkshire receives are reinvested in buying more stocks, so the holding company ends up with more assets per share which results in capital gains that would be taxable only if the shares are sold.

Warren Buffett is the second wealthiest person in America, but he reports surprisingly little taxable income for someone who owns more than $50 billion of Berkshire shares. Increasing the tax rate on salaries and interest income would barely affect him.

He pays himself a salary of just $100,000, which explains how he pays less than his employees do in payroll taxes. He dodged the estate tax by donating his wealth to the Bill and Melinda Gates Foundation. He doubtless reduces his taxable income with other donations to charity, which explains why he repeatedly refers to taxable income rather than adjusted gross income.

Mr. Buffett ends by appointing himself tax czar and declares he “would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more … (he) would suggest an additional increase in rate.”

Since he only reports $100,000 of salary, he has nothing to lose by advocating a higher tax rate on salaries. Nearly all of his income in 2010 consisted of capital gains on sales of Berkshire shares, because those shares pay no dividends. But Buffett could just as easily hang onto appreciated shares rather than selling them, or he could donate them to charity.

Raising tax rates on dividends and capital gains sounds easier than it is. Nobody with substantial wealth can be forced to realize taxable gains by selling appreciated assets. A realized gain is no more valuable than an unrealized gain. On the contrary, it is less valuable by the amount of the tax.

Nobody can be forced to hold dividend-paying stocks either. They can instead buy Berkshire Hathaway shares if the tax on dividends goes up, as Buffett understands.

Despite his personal and professional dependence on capital gains, Buffett nevertheless feigns total ignorance of who pays the capital gains tax and why. He says, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9% in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Well, the Dow Jones industrial average was 831 at the end of 1977 — down from 969 at the end of 1965 — so somebody was having trouble finding investments that would still look sensible after paying a 39.9% tax.

In any case, for Buffett to focus on the act of buying stocks or property is all wrong. The capital gains tax is not a tax on buying assets. It is a tax on selling assets. If you don’t sell, there is no tax. And when the capital gains tax is high, very few people are willing to sell.

In 1977, when the capital gains tax was 39.9%, realized gains amounted to less than 1.57% of GDP. From 1987 to 1996, when the capital gains tax was 28%, realized gains rose to 2.3% of GDP. Since 28% of 2.3 is larger than 39.9% of 1.57, the lower tax rate clearly raised more tax revenue.

From 2004 to 2007, when the capital gains tax was 15%, realized gains amounted to 5.2% of GDP. Since 15% of 5.2 is larger than 28% of 2.3, the lower tax rate again raised more tax revenue. The government cannot afford to raise this tax, particularly on those most likely to pay it.

Buffett focuses on the 400 tax returns with the highest reported incomes, which are often one-time capital gains from the sale of a business or real estate.

“In 1992,” he writes, “the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2% 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%.”

In 1992 only 39% of reported income of the top 400 came from capital gains and dividends because those tax rates were so high. With most reported income coming from salaries, the average tax rate was high.

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

 

More by Alan Reynolds

By 2008, 67% of reported income of the top 400 came from capital gains and dividends because both were taxed at 15%. That diluted the average tax rate, yet nevertheless resulted in much more taxes paid because the amount of reported income was so much larger.

The big change was not in actual income, but merely in what the IRS counts as income. People were hiding more of their wealth in 1992 than they did in 2006-2008, and they were hiding even more in 1977.

It is easy to advocate a higher tax rate on capital gains, but it is even easier to avoid paying that higher tax rate. Simply hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses.

The evidence is undeniable that affluent investors and property owners report far fewer gains whenever the capital gains tax goes up. Choosing to pay tax on capital gains and dividends is usually voluntary, and when the rate gets too high we run short of volunteers.

With the super-high 1977 tax rates of 39.9% on capital gains and 70% on dividends and salaries, federal revenues were 18% of GDP. In 1992, revenues were only 17.5% of GDP. In 2007, thanks in large part to a 15% tax rate on capital gains and dividends, revenues were 18.5% of GDP.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous. It didn’t work then, and it wouldn’t work now.

The Laffer Curve, Part III: Dynamic Scoring

Uploaded by on May 28, 2008

A video by CF&P Foundation that builds on the discussion of theory in Part I and evidence in Part II, this concluding video in the series on the Laffer Curve explains how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that “static scoring” should be replaced with “dynamic scoring” so that lawmakers will have more accurate information when making decisions about tax policy. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org.

Brantley, Buffett and Obama: “Stop coddling the rich”

Brantley, Buffett and Obama: “Stop coddling the rich”

The Laffer Curve, Part I: Understanding the Theory

Max Brantley is fond of accusing Republicans of coddling the rich and here comes Warren Buffett and validates both what President Obama and Brantley have been saying. However, will the increase in taxes have the desired result that they are wanting?

Higher Tax Rates on Rich Won’t Increase Revenues

by Alan Reynolds

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

Added to cato.org on September 13, 2011

This article appeared on Investor’s Business Daily on September 12, 2011.

In last week’s campaign speech disguised as an address to Congress, President Obama said, “Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix.”

Writing recently in The New York Times, the famed chairman of Berkshire Hathaway complained that his federal income tax last year was “only 17.4% of my taxable income” — less than $7 million on a taxable income of about $40 million.

Buffett claimed that, like himself, other “mega-rich pay income taxes at a rate of 15% on most of their earnings,” but that is not at all common. The average income-tax rate of those earning between $1 million and $10 million was 29.5% in 2009.

Obama used Buffett’s uniquely low 17.4% tax as proof that “a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets.” That is not true.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous.

Anyone whose income is almost entirely composed of realized capital gains or dividends would “pay income taxes at a rate of 15% on most of their earning.” Investors with modest incomes also pay a tax rate of 15% on dividends and capital gains, although that rate is scheduled to rise to 18.8% under the Obama health law (and much higher if Congress enacted the “reforms” Obama will propose next Monday).

Before 2003, when the tax on dividends was made the same as the tax on capital gains, Berkshire Hathaway was a handy tax dodge — a way to own dividend-paying stocks without paying taxes on the dividends. Buffett is famous for collecting stocks with a generous dividend yield without Berkshire itself paying any dividend.

The dividends Berkshire receives are reinvested in buying more stocks, so the holding company ends up with more assets per share which results in capital gains that would be taxable only if the shares are sold.

Warren Buffett is the second wealthiest person in America, but he reports surprisingly little taxable income for someone who owns more than $50 billion of Berkshire shares. Increasing the tax rate on salaries and interest income would barely affect him.

He pays himself a salary of just $100,000, which explains how he pays less than his employees do in payroll taxes. He dodged the estate tax by donating his wealth to the Bill and Melinda Gates Foundation. He doubtless reduces his taxable income with other donations to charity, which explains why he repeatedly refers to taxable income rather than adjusted gross income.

Mr. Buffett ends by appointing himself tax czar and declares he “would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more … (he) would suggest an additional increase in rate.”

Since he only reports $100,000 of salary, he has nothing to lose by advocating a higher tax rate on salaries. Nearly all of his income in 2010 consisted of capital gains on sales of Berkshire shares, because those shares pay no dividends. But Buffett could just as easily hang onto appreciated shares rather than selling them, or he could donate them to charity.

Raising tax rates on dividends and capital gains sounds easier than it is. Nobody with substantial wealth can be forced to realize taxable gains by selling appreciated assets. A realized gain is no more valuable than an unrealized gain. On the contrary, it is less valuable by the amount of the tax.

Nobody can be forced to hold dividend-paying stocks either. They can instead buy Berkshire Hathaway shares if the tax on dividends goes up, as Buffett understands.

Despite his personal and professional dependence on capital gains, Buffett nevertheless feigns total ignorance of who pays the capital gains tax and why. He says, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9% in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Well, the Dow Jones industrial average was 831 at the end of 1977 — down from 969 at the end of 1965 — so somebody was having trouble finding investments that would still look sensible after paying a 39.9% tax.

In any case, for Buffett to focus on the act of buying stocks or property is all wrong. The capital gains tax is not a tax on buying assets. It is a tax on selling assets. If you don’t sell, there is no tax. And when the capital gains tax is high, very few people are willing to sell.

In 1977, when the capital gains tax was 39.9%, realized gains amounted to less than 1.57% of GDP. From 1987 to 1996, when the capital gains tax was 28%, realized gains rose to 2.3% of GDP. Since 28% of 2.3 is larger than 39.9% of 1.57, the lower tax rate clearly raised more tax revenue.

From 2004 to 2007, when the capital gains tax was 15%, realized gains amounted to 5.2% of GDP. Since 15% of 5.2 is larger than 28% of 2.3, the lower tax rate again raised more tax revenue. The government cannot afford to raise this tax, particularly on those most likely to pay it.

Buffett focuses on the 400 tax returns with the highest reported incomes, which are often one-time capital gains from the sale of a business or real estate.

“In 1992,” he writes, “the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2% 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%.”

In 1992 only 39% of reported income of the top 400 came from capital gains and dividends because those tax rates were so high. With most reported income coming from salaries, the average tax rate was high.

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

 

More by Alan Reynolds

By 2008, 67% of reported income of the top 400 came from capital gains and dividends because both were taxed at 15%. That diluted the average tax rate, yet nevertheless resulted in much more taxes paid because the amount of reported income was so much larger.

The big change was not in actual income, but merely in what the IRS counts as income. People were hiding more of their wealth in 1992 than they did in 2006-2008, and they were hiding even more in 1977.

It is easy to advocate a higher tax rate on capital gains, but it is even easier to avoid paying that higher tax rate. Simply hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses.

The evidence is undeniable that affluent investors and property owners report far fewer gains whenever the capital gains tax goes up. Choosing to pay tax on capital gains and dividends is usually voluntary, and when the rate gets too high we run short of volunteers.

With the super-high 1977 tax rates of 39.9% on capital gains and 70% on dividends and salaries, federal revenues were 18% of GDP. In 1992, revenues were only 17.5% of GDP. In 2007, thanks in large part to a 15% tax rate on capital gains and dividends, revenues were 18.5% of GDP.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous. It didn’t work then, and it wouldn’t work now.

The Laffer Curve, Part III: Dynamic Scoring

Uploaded by on May 28, 2008

A video by CF&P Foundation that builds on the discussion of theory in Part I and evidence in Part II, this concluding video in the series on the Laffer Curve explains how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that “static scoring” should be replaced with “dynamic scoring” so that lawmakers will have more accurate information when making decisions about tax policy. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org.

Buffett wants the rich soaked but that will not solve our problem in the budget

Max Brantley on the Arkansas Times Blog, August 15, 2011, asserted:

Billionaire Warren Buffett laments, again, in a New York Times op-ed how the rich don’t share the sacrifices made by others in the U.S.. He notes his effectiie tax rate of 17 percent is lower than that of many of the working people in his office on account of preferences for investment income. Candidates such as U.S. Rep. Tim Griffin believe — with election results to support them — that Americans support such a tax system.

In the article below, Jeffrey Miron gives figures that show that Buffett is wrong about soaking the rich to solve our budget problem. However, he also shows how the federal government has acted in such a way

Why Warren Buffett Is Wrong

by Jeffrey A. Miron

This article appeared on CNN.com on August 16, 2011.

In a recent New York Times op-ed article, Warren Buffett asserts that the super-rich do not pay enough taxes. He suggests that any new budget deal should raise rates on the super-rich, especially on their “unearned” income from interest, dividends and capital gains.

Buffett is wrong. Bad government policies play a major role in generating inappropriately high incomes, but singling out the super-rich is misguided. And the policy Buffett criticizes most — low tax rates on capital income — should be expanded, not eliminated.

The first problem with Buffett’s view is that the number of super-rich is too small for higher rates to make much difference to our budget problems.

In 2009, the income earned by the 236,833 taxpayers with more than $1 million in adjusted gross income was about $727 billion. Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue — only about 2% of federal spending. And $73 billion is optimistic; the super-rich will avoid or evade much of the surcharge, significantly lowering its yield.

Bad government policies play a major role in generating inappropriately high incomes, but singling out the super-rich is misguided.

Focusing on the super-rich also fosters a counterproductive attitude toward material success. The way to promote a hard-working, entrepreneurial and innovative society is to celebrate great wealth so long as it has been earned by legitimate means. When this is not the case, policy should target the wrongdoing directly, not demonize everyone who hits it big.

Most importantly, singling out the super-rich distracts from the real problem: the myriad policies that make no sense in the first place because they inhibit economic growth and that simultaneously redistribute from low-income households to the middle and upper classes.

The deductibility of home mortgage interest encourages excess investment in housing. High-income taxpayers get the benefits, since low-income taxpayers own little or no housing and do not itemize deductions in any case.

The favorable tax treatment of employer-paid health insurance generates overconsumption of health care and contributes to rising health care costs. The benefits go mainly to middle- and upper-income households, since those without jobs get no employer-provided benefits.

Numerous loopholes for favored industries in the corporate tax code distort the market’s investment decisions and reward the well-funded and politically connected.

And it is not just the tax code that harms the economy while favoring the better off.

Excessive licensing requirements, permitting fees, restrictive examinations and other barriers to entry into medicine, law, plumbing, hair styling and many other professions are bad for economic productivity because they artificially restrict the supply of these services. And these barriers redistribute income perversely by raising incomes for those protected and raising prices for everyone.

Crony capitalism — the special treatment of favored industries like autos — runs counter to economic efficiency because it protects businesses that would otherwise fail, and it maintains high incomes for executives and shareholders.

The too-big-to-fail doctrine, exhibited most recently in the TARP bailout of Wall Street banks, distorts efficiency by encouraging excess risk-taking. Meanwhile, bailouts generate huge incomes for the lucky few who keep gains in good times and pass losses to taxpayers in bad times.

In contrast to these and other policies, the one Buffett criticizes — low tax rates on capital income — is beneficial for the economy, including lower-income households.

Jeffrey Miron is senior lecturer and director of undergraduate studies at Harvard University and Senior Fellow at the Cato Institute. He is the author ofLibertarianism, from A to Z.

More by Jeffrey A. Miron

Economists agree broadly that an efficient tax system should avoid taxing income, dividends and capital gains to promote savings, investment and growth. Tax rates on capital income should therefore be low or even zero. The U.S. is far from this ideal, especially given the high tax rate on corporate income and the additional taxation at the personal level.

Buffet asserts that taxing capital income has never deterred anyone from investing. Well, then he has never discussed the issue with me or many of my friends.

More importantly, taxing investment returns plays a huge role in what kinds of investments occur, and where, even if it has minor effects on the amounts. These tax-induced distortions in investment choices then reduce economic growth. High U.S. taxation on capital income drives investment overseas.

So raising capital tax rates will not make the super-rich pay their “fair” share; it will encourage capital flight, driving factories and innovation abroad. The rich will still get their high returns, but U.S. workers will have fewer jobs and lower wages.

Buffett errs, most fundamentally, by focusing on outcomes rather than policies. The right question is which policies promote differences in incomes that reflect hard work, energy, innovation and creativity, rather than reward the unethical, the politically connected and the tax-savvy.

In economics, as in sports, we should adopt good rules and insist that everyone play by them. Then we should stand back and applaud the winners.

Five Key Reasons to Reject Class-Warfare Tax Policy

Brummett touts Buffett’s math, but it is wrong

Five Key Reasons to Reject Class-Warfare Tax Policy

Max Brantley on the Arkansas Times Blog, August 15, 2011, asserted:  

Billionaire Warren Buffett laments, again, in a New York Times op-ed how the rich don’t share the sacrifices made by others in the U.S.. He notes his effectiie tax rate of 17 percent is lower than that of many of the working people in his office on account of preferences for investment income. Candidates such as U.S. Rep. Tim Griffin believe — with election results to support them — that Americans support such a tax system.

There is one huge problem with this math. Taxes on dividends and corporate taxes and the death tax are all DOUBLE TAXATION.

Warren Buffett’s Fiscal Innumeracy

Posted by Daniel J. Mitchell

Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.

My first instinct is to send Buffett the website where people can voluntarily pay extra money to the federal government. I’ve made this suggestion to guilt-ridden rich people in the past.

But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.

But Buffett goes beyond guilt-ridden rants in favor of higher taxes. He makes specific assertions that are inaccurate.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

His numbers are flawed in two important ways.

  1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be significant.
  2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding  retirement benefit (which actually is tilted in favor of low-income workers).Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).

If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.

But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.

So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.