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Warren Buffett Wrong Again on Tax Increases

Posted By Curtis Dubay On November 26, 2012 @ 6:20 pm In Featured | Comments Disabled

As we approach the “fiscal cliff,” there was little doubt that famed investor and self-appointed political sage Warren Buffett would pipe in at some point with his periodic call for higher taxes on his ilk of billionaires. Today was the day [1].

Buffett, of course, is welcome to his opinion, but it is amazing that anyone would listen to him on federal budget matters any more than they would listen to Justin Bieber or Jimmy Buffett.

Buffett uses the “spaghetti against the wall approach” in his op-ed. In this brand of argument, the writer throws a slew of arguments against the wall to see if anything sticks. Cutting through the plentiful clutter, in essence Buffett argues that we need to raise taxes on the rich to make them write bigger checks to Uncle Sam and thereby lower the deficit. As usual [2], Buffett’s argument for higher taxes falls flat when confronted with basic facts.

Buffett, the inspiration behind President Obama’s much-hyped Buffett Rule, which called for a minimum 30 percent effective tax rate on millionaires, argues again for the same.

Buffett forgets that we already have a minimum tax. It is called the Alternative Minimum Tax (AMT). And since Congress passed it in the late 1960s, it has become more of a scourge of the middle class than the rich. If Congress foolishly adopted Buffett’s minimum tax, we can be sure that it would quickly grow to hammer the middle class the same way the old AMT did.

He also fails to mention that the Buffett Rule is already largely in effect. According to the Congressional Budget Office [3] (CBO), the top 1 percent of earners (those with incomes over $1.2 million in 2009) pay an effective tax rate on all federal taxes of 29 percent. That’s almost three times as high as the 11 percent average rate paid by the middle class.

Buffett’s argument about the rich paying a lower rate is superficially plausible because the dividend and capital gains tax rates are currently set at 15 percent. Notice that even this rate is greater than the 11 percent average rate applied to the middle class. More critically, this 15 percent rate is applied after a 35 percent corporate income tax rate is applied. Buffett, being the world-class investor that he is, of course knows that the corporate tax gets subtracted first. He just ignores that little fact. Maybe somebody will ask him why someday.

That’s one half of Buffett’s argument debunked with facts.

The other half of Buffett’s argument is also undone with data from CBO. Buffett writes that we need to raise taxes to get total federal tax revenue up from its current 15.5 percent of GDP to 18.5 percent—the historical amount of revenue raised by the federal tax system post–World War II in periods of economic expansion. However, revenues are as low as they are currently because of the slow-growing economy. As the economy recovers, so too will revenues.

In 2007, before the worldwide economic meltdown, revenues were at the 18.5 percent of GDP mark. CBO estimates [4] in its “Alternative Fiscal Scenario” that if Congress kept all current tax policies in place—including the Bush-era tax policies and all other tax increases in Taxmageddon [5] (except the payroll tax cut)—tax revenue will surpass 18 percent of GDP in 2016—just four years from now. CBO estimates that revenue will approach 18.5 percent soon thereafter.

The simple fact is that tax increases are not necessary to return tax receipts to their historical level in the near future. All that is needed is for the economy to escape the pall of Obama’s economic policies and ignite.

Buffett also calls for spending at about 21 percent of GDP. Currently, the White House estimates that spending will be 24.3 percent [6] of GDP this year—well above Buffett’s target. The difference underscores why the fervor to get Republicans to accept tax hikes is so badly misplaced. Excessive spending is the problem, not low tax revenue.

If Buffett still remains worried that tax receipts are too low, despite the facts that show it isn’t, he should be reminded that the Treasury Department is happy to take donations [7] from him and his fellow billionaires any time they want to cut a check.

Update: An earlier version of this post cited an older figure that estimated spending at 24.3 percent of GDP.

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/11/26/warren-buffett-wrong-again-on-tax-increases/

URLs in this post:

[1] Today was the day: http://www.nytimes.com/2012/11/26/opinion/buffett-a-minimum-tax-for-the-wealthy.html

[2] As usual: http://www.heritage.org/research/reports/2011/10/the-buffett-rule-fair-to-no-one

[3] Congressional Budget Office: http://www.cbo.gov/sites/default/files/cbofiles/attachments/43373-06-11-HouseholdIncomeandFedTaxes.pdf

[4] CBO estimates: http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf

[5] other tax increases in Taxmageddon: http://www.heritage.org/research/reports/2012/04/taxmageddon-massive-tax-increase-coming-in-2013

[6] estimates that spending will be 24.3 percent: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/13msr.pdf

[7] Treasury Department is happy to take donations: http://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm

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