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  • Lesson for Warren Buffett: British Millionaires' Response to Tax Increases

    As the fiscal cliff approaches, Congress and President Obama continue to debate tax increases, even though spending is the problem. Investor Warren Buffett recently opined that tax hikes on the wealthy would not curtail investments or hurt the economy. His logic, like President Obama’s, assumes that incentives don’t matter.

    Oh really? News that Great Britain saw its number of millionaires decline by two-thirds due to a steep top tax rate tells a different story.

    The year after former Labour Prime Minister Gordon Brown introduced a 50 percent top income tax rate, the number of people filing as millionaires dropped 63 percent, from 16,000 to 6,000. Tax revenue also declined by nearly £7 billion.

    No single reason explains the drop. Some millionaires probably earned less money due to the slow-growing European economy, or they may have simply worked less. Others may have shifted the timing of their income or moved it to less-taxed forms. Still others might have physically left the country.

    Here’s the bottom line: All these reasons are economically important and show that incentives matter.

    That fact is so obvious it’s hardly newsworthy. When faced with a tax increase, Britain’s millionaires readily “voted with their feet.” Whether they actually fled the country or not doesn’t really matter. But the fact that their productivity level changed—and in such a drastic way—does.

    As for Buffett’s claim that investors don’t change their decisions based on tax rates—who does he think the people who left Britain are? They are highly productive people who earn high incomes and invest their earnings. High earners are the most able to respond to changing incentives, and their response to a tax increase was loud and clear. Their change in behavior means there will be less investment in Great Britain and, therefore, fewer jobs.

    America had better listen up. Highly productive workers here at home would respond to the incentives under Obama’s tax hike policy, which has a top tax rate of over 40 percent, factoring in the return to pre-Bush tax cut rates and the hospital insurance payroll tax rate increase in Obamacare.

    Upper-income earners would certainly shift their income; they would also have less incentive to work more hours knowing that over 40 percent of their additional earnings would go straight to Washington—even before their state and local governments get into the act. What does Buffett think will happen to investment when these peoples’ incomes plummet and they have less to invest?

    California’s unfriendly business climate also proves the point. In 2011, 254 companies took some or all of their businesses out of the state, a 26 percent increase from the previous year. This November, Californians approved a “temporary” income surtax on people making more than $250,000, as well as a sales tax increase. Such tax hikes will hardly compel businesses and investors to stick with the Golden State and may continue having the opposite effect.

    Growing cities in low-tax states, such as Austin, Texas, will cheer the news, as they’ll continue to welcome refugees from California’s punishingly high taxes—especially high-skilled workers and cutting-edge tech companies.

    Taxes do matter, because investors respond to incentives. Hardly surprising, but a good reminder—one that President Obama should heed.

    Posted in Featured, Obamacare [slideshow_deploy]

    9 Responses to Lesson for Warren Buffett: British Millionaires' Response to Tax Increases

    1. Ramin Shirvanioun says:

      Growing cities in low tax state..

    2. Imagine that, Conservatism once again proven right!

    3. Jen says:

      That's why the very rich want higher taxes. The very rich have power & influence with politicians….
      and others. The very rich want to reduce their own competition for this power & influence. Does anyone really think the very wealthy who advocate for higher taxes are being altruistic? They are culling their ownranks and they couldn't care less aboout how it affects the rest of us. They are taking care of themselves.

    4. Paul Terry Stone says:

      Obama and Warren Buffett must have worked out some deal that benefits both of them to get Buffett to agree to paying more taxes and encouraging higher rates on the wealthy.

    5. Lloyd Scallan says:

      Warren Buffett has more money than God. He is insulated from the real world of the "common folk" thus has taken a position behind a true Marxist and his agenda. He does not have to listen or learn from anything or anyone. He sits at the right hand of the "lord and savior" Obama. He does not need to learn. His billions give him the right.

    6. Mike, Wichita Falls says:

      That's why we must fight for federalism. When one state goes too far into people's wallets, they have some recourse. If all power is centralized, leaving the country is the only recourse…and that only for the rich who can afford to do so.

      Come to Texas! Water is our only problem.

    7. Just a 53%er says:

      Look it up. In 2011 the U.S. Had a record number of millioaires. The casino called the stock market has his historical highs. Borrowing money for two wars of choice does not help.

    8. Dennis McKee says:

      Why would a person work harder if they know that over 40% goes to a government they did not vote for

    9. joe says:

      The answer to why Warren Buffet and people like him support these are a few fold, but the major reason. Is this, there is no wealth tax. Which i also do not support. So the 40 Billion he already has is untouched. He doesn't need "income" at all. Do you know that if you have even say 50 million dollars in stock, you can just go to the bank and borrow a million a year for 30-40 years. Never pay a penny in income tax and when you die, the estate pays back the bank before distributing the money. These super rich don't need INCOME! People who rely on the income, are the small business owners who are successful. They are not a capitalized company, almost all their wealth is in the company. If they stopped working they would probably also loose all the wealth as the company went bankrupt. They live on the 400K or whatever they make.

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